Indicate by check mark if
the registrant is a well-known seasoned issuer, as defined in Rule 405 of
the Securities Act. Yes o No x

Indicate by check mark if
the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of
the Exchange Act. Yes o No x

Indicate by check mark
whether the registrant (1) has filed all reports required to be filed by Section 13
or 15(d) of the Securities Exchange Act of 1934 during the preceding 12
months (or for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes x No o

Indicate by check mark if
disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is
not contained herein, and will not be contained, to the best of registrants
knowledge, in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to
this Form 10-K. o

Indicate by check mark
whether the registrant is a large accelerated filer, an accelerated filer, or a
non-accelerated filer. See definition of accelerated filer and large
accelerated filer in Rule 12b-2 of the Exchange Act.

Large accelerated filer o Accelerated filer x Non-accelerated filer o

Indicate by check mark
whether the registrant is a shell company (as defined in Rule 12b-2
of the Exchange Act). Yes o No x

The aggregate market value
of voting stock held by non-affiliates of the registrant as of June 30,
2006 was approximately $123.7 million computed by reference to the closing
price on such date.

On March 20, 2007, the
number of shares of common stock outstanding of the registrants common stock
was 25,842,712.

The information required by
Part III of this report, to the extent not set forth herein, is
incorporated herein by reference from the registrants definitive proxy
statement relating to the Annual Meeting of Stockholders to be held in 2007,
which definitive proxy statement shall be filed with the Securities and
Exchange Commission within 120 days after the end of the fiscal year to which
this report relates.

As used in this annual
report on Form 10-K, the terms we, us, our and the Company
refer to Outdoor Channel Holdings, Inc. and its subsidiaries as a combined
entity, except where noted or where the context makes clear the reference is
only to Outdoor Channel Holdings, Inc. or one of its subsidiaries.

The information
contained in this report may include forward-looking statements. Our
actual results could differ materially from those discussed in any
forward-looking statements. The statements contained in this report that are
not historical are forward-looking statements within the meaning of Section 27A
of the Securities Act of 1933, as amended (the Securities Act), and Section 21E
of the Securities Exchange Act of 1934, as amended (the Exchange Act),
including statements, without limitation, regarding our expectations, beliefs,
intentions or strategies regarding the future. We intend that such
forward-looking statements be subject to the safe-harbor provisions contained
in those sections. Such forward-looking statements relate to, among other
things: (1) expected revenue and earnings growth and changes in mix; (2) anticipated
expenses including advertising, programming, personnel and others; (3) Nielsen
Media Research, which we refer to as Nielsen, estimates regarding total
households and cable and satellite homes subscribing to and viewers (ratings)
of The Outdoor Channel; and (4) other matters. We undertake no obligation
to publicly update or revise any forward-looking statements, whether as a
result of new information, future events or otherwise.

These statements involve significant risks and uncertainties and
are qualified by important factors that could cause our actual results to
differ materially from those reflected by the forward-looking statements. Such
factors include but are not limited to risks and uncertainties which are
discussed below under Item 1A Risk Factors and other risks and
uncertainties discussed elsewhere in this report. In assessing forward-looking
statements contained herein, readers are urged to read carefully all cautionary
statements contained in this Form 10-K and in our other filings with
the Securities and Exchange Commission. For these forward-looking statements, we
claim the protection of the safe harbor for forward-looking statements in Section 27A
of the Securities Act and Section 21E of the Exchange Act.

We own and operate
The Outdoor Channel®, a national television network devoted to traditional
outdoor activities such as hunting, fishing and shooting sports, as well as
off-road motor sports and other outdoor related lifestyle programming. Our
target audience is comprised of sportsmen and outdoor enthusiasts throughout
the U.S. According to a survey by the U.S. Fish and Wildlife Service,
in 2001 there were over 82 million outdoor enthusiasts throughout the
U.S. who spent in excess of $100 billion in pursuit of their outdoor
activities. As of December 2006, we had relationships or agreements with
the 10 largest cable and satellite companies in the U.S. Through these
arrangements and others, The Outdoor Channel is carried by approximately 6,200
individual cable and satellite service providers making The Outdoor Channel
available to, meaning that it could potentially be subscribed to by, over
81.1 million U.S. households. According to estimates by Nielsen, The
Outdoor Channel was subscribed to by approximately 29.7 million households
in December 2006.

Nielsen is the
leading provider of television audience measurement and advertising information
services worldwide. Nielsens estimate of the number of households subscribing
to a particular network is based upon a statistical method, and this estimate
is generally accepted in the industry as being the standard for measuring the
number of households a buyer of network advertising time can potentially reach.
Typically the Nielsen estimate of the number of subscribing households to a
particular network

3

exceeds
the number of subscribers on which the network is being paid by the service
providers for the following reasons, among others:

·inherent
errors in Nielsens statistical methodology;

·a
two to four month delay in the reporting of the number of subscribers on which
the service provider is paying the network;

·service
providers paying a network on a lower number of subscribers than those actually
subscribing to the network because of special arrangements they have made with
various groups of subscribers, for example, a service provider may agree to
charge an apartment complex for only 100 units in a 150 unit complex; Nielsens
estimate theoretically includes the entire 150 households, but the service
provider only reports 100 subscribing households; and

·theft
of a service providers television service; again, Nielsen should include these
households in its estimate, but the service provider would not report such
household as a subscriber.

Please note that the estimate regarding The Outdoor
Channels subscriber base is made by Nielsen Media Research and is theirs
alone, and does not represent our opinions, forecasts or predictions. It should
not be implied that we endorse nor necessarily concur with such information,
simply due to our reference to or distribution of their estimate. Although we
realize Nielsens estimate is typically greater than the number of subscribers
on which a network is paid by the service providers, we are currently
experiencing a greater difference than we would expect, and we anticipate this
difference to decrease as we grow our total number of subscribers.

The Outdoor
Channel was established in 1993 and began broadcasting 24 hours a day in May 1994.
Since inception, we have been committed to providing excellent programming and
customer service to our distribution partners. In recognition of our efforts,
The Outdoor Channel was named Programmer of the Year in 2003 by the National
Cable Television Cooperative. We believe The Outdoor Channel provides viewers
with a unique destination for authentic, informative and entertaining outdoor programming.
As a result, we believe that our viewers tend to be more loyal and spend more
time watching The Outdoor Channel than other networks that offer outdoor
programming. We also believe that The Outdoor Channel has become a desirable
network for advertisers of products and services used by outdoor enthusiasts.

We also own and operate two national membership organizations,
Gold Prospectors Association of America, LLC, or GPAA, and LDMA-AU, Inc.,
or Lost Dutchmans. The theme of these organizations is the search for gold
deposits and treasures while enjoying the outdoors. Initially, we created The
Outdoor Channel to market memberships in these organizations by airing
programming related to these activities. Through this process, we discovered
that members in these organizations were very enthusiastic about their
activities which resulted in a strong consumer demand for The Outdoor Channel.
We believe by airing programs associated with our membership organizations and
other membership, or affinity, organizations, such as the National Rifle
Association and the North American Hunting and Fishing Clubs, we enhance
consumer demand and consequently provide opportunities to increase the number
of subscribers to The Outdoor Channel.

During 2006, we completed the build-out of our new
digital broadcast facility with the grand opening on March 31, 2006. This
facility provided the infrastructure such that we now own a play-back and
satellite up-link for multiple signals including our east and west coast feeds
as well as our high definition feed. We continued to expand our in-house
programming efforts to increase advertising inventory, improve quality control
and better positioning ourselves for the future launch of a multichannel
broadband product, VOD and other re-purposing strategy.

4

In the third quarter of 2006, we hired outside
consultants to assist us in reviewing all aspects of our business including our
strategy for subscriber growth. These consultants recommended that we simplify
our offer to the distributors for increased distribution by offering them
reduced subscriber fees for the entire number of subscribers plus marketing
support in exchange for increased distribution instead of offering them launch
support only for the new subscribers resulting from such increased
distribution. In addition, these consultants made suggestions to improve our
programming and on-air look. We adopted these new strategies and hired cable
industry pioneer, Roger L. Werner, Jr. as CEO to implement them. Mr. Werner
has held similar positions with ESPN, Prime Ticket (now Fox Sports West), La
Cadena Deportiva (now Fox Sports Americas), Speedvision (now Foxs Speed
Channel), and Outdoor Life Network (now Comcasts Versus).

Under Mr. Werners
new leadership, we have begun approaching the market with a new plan to grow
the subscriber base, begun a re-branding of our channelincluding a new logo
and our on-air look, expanded and refocused our affiliate marketing staff
efforts and have reinvigorated our advertising sales efforts. We have also
undertaken an initiative to build and provide an updated web site to become the
leading authority on outdoor activities, including the delivery of much of our
video content via broadband. Although we anticipate undertaking these initiatives
will increase our costs in the near term, we believe such strategic pursuits
will ultimately enhance our long-term performance.

Historically,
television broadcasters have transmitted signals through the airwaves and
households received the signals through antennas at no cost. This method of
broadcasting signals had several disadvantages. The signal could not reach many
areas due to signal strength, remoteness of many communities and topography. In
addition, for those households that could receive the signal, it often produced
poor picture and sound quality.

Unlike traditional
television broadcasters which deliver their programming without charge, cable
companies provide subscription television service for a fee. These service
providers transmit signals through coaxial cable connected directly to
individual homes. In most markets, this service delivers a much improved
picture and sound quality and offers an increased number and wider variety of
channels as compared to broadcast television. In addition to using cable for
connectivity, companies use satellite technology to provide subscription
television service directly to households. This industry of providing
television service to households for a fee, or on a subscription basis, is
typically referred to as pay television.

The pay television
industry is comprised primarily of two segments: service providers and
networks.

Service
Providers. Pay television service
providers, also commonly referred to as distributors, are primarily comprised
of two types: cable and satellite. These service providers own and operate the
platforms they use to deliver television programming to subscribers. Cable and
satellite service providers compete against each other for subscribers. These
service providers attempt to create a mix of channels, or tiers, that will be
attractive to the households in the markets they serve in an effort to attract
and retain these households as subscribers. Historically, service providers
generate revenue primarily by selling television service to households. They
also make many of the programming decisions, including which channels to carry
and in which packaged offering, or tier, a channel should be included.

Cable
Systems. Pay
television cable systems consist of two groups: independent cable providers and
multi-system cable operators, or MSOs. Independent cable providers are smaller,
individual systems that deliver the television signal to households in only one
or a limited number of regions. Generally, independent cable service providers
operate in distinct markets that range from large metropolitan centers to small
rural areas and do not compete directly with each other in their respective
markets. In comparison, MSOs are companies that are affiliated with, or
control, a number

5

of regional or individual cable systems. Examples of MSOs include
Time Warner Cable and Comcast Cable Communications. In many instances, channels
need to establish a relationship with an MSO in order to pursue carriage on its
affiliated regional cable systems. As of December 2006, cable providers
delivered pay television to approximately 69.1 million
U.S. households, according to Nielsen estimates.

Satellite
Systems.Pay television satellite systems
deliver television signals to households via orbiting satellites using digital
technology. Unlike cable, where the service providers generally do not compete
against each other, satellite service providers compete against each other
directly because reception from any one satellite service provider is generally
available to substantially all viewers wishing to subscribe to it. Examples of
satellite service providers include DIRECTV® and DISH Network. As of December 2006,
there were approximately 27.3 million homes receiving pay television using
some means other than cable, according to Nielsen. We believe that most of
these households subscribe to a satellite service.

Networks. Networks, also commonly referred to
as television channels, bring together television programs and package them
into a branded schedule of entertainment. The two types of networks
include broadcast networks, which are available to households through
traditional broadcast free of charge, and pay television networks, which are
only available to households through cable and satellite service providers.
Most networks are owned by MSOs or media conglomerates. In order to secure the
content necessary for a cohesive schedule, channels can produce programming internally
and acquire third-party programming from production companies. Broadcast
networks, which are regulated by the Federal Communications Commission, or the
FCC, generate revenue primarily by selling advertising whereas pay television
networks generate revenue by both selling advertising included in their
programming and through subscription fees paid by service providers for the
right to deliver the network to their customers.

To gain distribution to households, new networks need to establish
carriage agreements with service providers. In order to initiate or improve
carriage, many networks, and in particular those networks not affiliated with
any major service provider, may need to offer launch incentives, which can
include marketing support, upfront cash payments or other forms of incentives.
These incentives or payments are typically made on a per-subscriber basis and
generally before receiving any subscriber fee revenues.

Transition
from Analog to Digital in Cable Systems. Cable distribution has been
undergoing dramatic changes in the technologies that are used to deliver
programming and services including digital transmission technology. Digital
transmission enables improved picture and sound quality, faster signal transmission
and additional channel capacity. Cable system operators can now offer
additional services such as pay-per-view, video-on-demand and connectivity for
Internet and telephone service. We believe households that receive a digital
signal account for over one-third of the households reached by cable providers.

Emergence
of High Definition Television. Digital transmission
technology, whether used by cable or satellite systems, provides a
platform for a new content category: high-definition television, which is
commonly referred to as HD TV. HD TV offers a clearer and sharper picture and
enhanced sound, as compared to standard definition television. In addition,
HD TV provides a wider field of vision than a standard definition
television. In order to deliver HD TV, service providers have invested and are
expected to continue to invest in HD-enabled infrastructure.

Channel
Proliferation. Increased system capacity
has enabled service providers to carry channels that offer programming on more
focused subject matter and themes. These channels can capture an audience that
is interested in a particular subject and chooses to watch dedicated and
consistently themed programming. We believe the audience demographics of these
specialized channels tend to be more highly

6

concentrated than those of general entertainment or broadcast
channels. As a result, such specialized channels offer advertisers an
opportunity to communicate with a highly targeted and relevant audience.

Focused and Segmented
Advertising. We believe many advertisers
have become increasingly dissatisfied with the results of broadcasting to a
broad audience and have become increasingly focused on maximizing the returns
generated per advertising dollar. We believe that individual, specialized
channels on pay television and broadband delivery of such content offer
advertisers the opportunity to reach a more focused demographic as compared to
broadcast television. To this end, we believe many advertisers have begun
dedicating portions of their advertising budgets towards channels focused on
targeted market segments whether delivered via television or on the internet
via broadband.

We believe that The Outdoor Channel is a preferred destination for
television viewers seeking high-quality, traditional outdoor programming. We
are differentiated from other television networks categorized as sports
networks that offer outdoor programming through our focus on traditional
outdoor activities such as hunting, fishing and shooting sports, as well as
off-road motor sports and other outdoor related lifestyle programming. Our
programming does not include team sports or extreme sports that other
networks offer, which we believe dilutes the interest of our target audience.
We believe this strategy has enabled us to build a loyal audience that tends to
watch The Outdoor Channel instead of other channels that offer a wide variety
of outdoor programming.

We believe that The Outdoor Channel delivers a television audience
that may not be as accessible through other networks and is particularly
desirable for advertisers seeking to target a large and concentrated audience
of outdoor enthusiasts. We believe The Outdoor Channel audience consists
primarily of males between the ages of 25 and 54, representing a demographic
for which many advertisers allocate a portion of their budgets. According to
studies by Mediamark Research Inc., in 2006, approximately 80% of the viewers
of The Outdoor Channel were male. Nielsen indicates that in December 2006
the majority of our viewers in primetime did not watch competing specialized
sports channels, such as The Golf Channel, Versus or Speed Channel.

We believe our programming appeals to traditional outdoor sports
enthusiasts, including those who hunt and fish. According to the U.S. Fish
and Wildlife Services latest survey conducted in 2001, there were estimated to
be over 82 million people who participated in outdoor recreation and spent
in excess of $100 billion pursuing these activities. Of this amount,
people who participated in fishing or hunting collectively spent approximately
$70 billion in pursuit of these activities. We believe that our
programming has strong appeal for viewers that may have participated in
traditional outdoor sports in the past or desire to do so in the future. As we
continue to increase our subscriber base, we believe that national accounts
will advertise on The Outdoor Channel to reach our focused audience of outdoor
enthusiasts.

We have relationships or affiliate agreements with the majority of
pay television service providers, including the 10 largest in the U.S.
According to Nielsen, The Outdoor Channel had approximately

7

29.7 million subscribers in December 2006.
Based on our estimates, The Outdoor Channel is currently available to, and
could potentially be subscribed to by, over 81.1 million households. As
our distribution agreements expire, we attempt to negotiate and renew such
agreements. Although our agreements with some of the major distributors have
expired (in some cases, some considerable time ago), all of such distributors
have continued to-date to carry our channel pursuant to the terms of the
expired agreement or similar terms while we negotiate renewals.

We anticipate that we will be able to transmit our programming to
additional subscribers with little or no incremental delivery costs. We also
believe that our programming, focused on traditional outdoor activities and
recorded in natural settings, tends to be less expensive to produce than
programming that requires elaborate sets, soundstages, highly compensated
actors and a large production staff. Furthermore, the timeless nature of our
outdoor programming allows us to rebroadcast and use our programming for
additional purposes.

The members of our senior management team and our board of
directors have significant experience in the cable television sector. The
Outdoor Channel was founded by outdoor enthusiasts for outdoor enthusiasts. We
believe that our thorough knowledge of the market for, and our active
participation in, outdoor activities fosters an unwavering commitment to
programming that is relevant to our viewers, producers, advertisers and
sponsors.

Our Business Growth
Strategies

The principal components of our strategy to grow our business are
as follows.

As a result of our focused content and affinity group marketing
initiatives, we have been successful in increasing our subscriber base to
approximately 29.7 million households in December 2006, as estimated
by Nielsen, from our estimate of approximately 5.3 million households in
1999. We intend to seek new opportunities to continue to grow our subscriber
base through the following initiatives:

·Expand distribution relationships. We intend to expand our marketing
and sales efforts to grow our subscriber base. Through our existing
relationships with carriers, we intend to offer service providers incentives to
migrate our channel from premium packages to more affordable basic or expanded
basic service packages with a greater number of subscribers. In addition, we
plan to continue to pursue agreements with additional service providers. The
incentives we intend to offer to service providers may include, but are
not limited to, the following:

·upfront payments to service
providers, in the form of cash or our securities;

·local marketing support, such as
promotional materials and sharing of costs for local advertising; and

·training support for customer
service representatives.

8

·Adopt HD technology. We believe that HD television
complements our outdoor-themed content. The audio and visual characteristics of
HD substantially enhance the experience and sense of adventure provided by our
programming. As a validation of the high quality, visually compelling nature of
our HD programming, through an arrangement with Premier Retail Networks, Inc.,
we provide branded HD content being used to promote the sales of HD television
sets in well known retail stores, such as Wal-Mart, Circuit City and Best Buy.
We are ready to assist service providers as they migrate their offerings to HD
TV by providing quality HD TV programming.

·Enhance Affiliate Sales Efforts. We plan to augment our affiliate sales team with personnel highly
experienced and trained in the industry. Such personnel will be located
throughout the United States in order to better cultivate and service the
service providers.

First, we plan to expand our relationships with our affinity
groups to better leverage the power of such organizations in our efforts to
grow and maintain our subscriber base. Second, we are expanding our on-air
promotions to better market our programs on our channel in an effort to enhance
ratings. Finally, we are developing cross-channel advertisements to market our
channel on other television networks.

We plan to attract
additional national advertisers to The Outdoor Channel, and we believe it will
become easier to do so if we are successful in our efforts to grow our
subscriber base. Over the past several years, we have increased our efforts to
demonstrate the benefits of advertising on The Outdoor Channel to companies
that advertise nationally. A significant portion of the increase in our
advertising revenue over the last two years is attributable to increases in
national advertising on The Outdoor Channel. Currently, national advertisers
such as Ace Hardware, Dickies, Quaker State, Geico Insurance, Optima, Party
Poker, Sprint, and the U.S. Army regularly advertise on The Outdoor
Channel. We believe our viewer demographics are attractive to these and many
other national advertisers. In an effort to increase our advertising revenue,
we have established a New York advertising sales office and plan to increase
our visibility to national advertisers.

We also offer
national advertisers the opportunity to sponsor several hours of themed
programming as a means to increase brand awareness and visibility to a targeted
audience. These opportunities, which we refer to as block-programming
sponsorships, enable advertisers to embed advertising messages and products in
the programming itself in addition to purchasing traditional commercial spots. Beginning
in January 2007, The Outdoor Channel offers nightly programming blocks
oriented around the following themes:
MondaysFishing; TuesdaysBig Game Hunting; WednesdaysWestern
Lifestyle/Shooting; ThursdaysBird Hunting; FridaysOff-Road Motorsports;
SaturdaysAdventure; and SundaysBig Game Hunting.

In addition, we believe we can capitalize on our position as the
leader in traditional outdoor sports programming with regards to the endemic
advertisers. For those manufacturers of products and providers of services
targeted to hunters and fishermen, we believe we offer the best value and
return for their advertising dollars.

We plan to improve the quality of our programming, both
technically as well as content, and to improve our on-air look. All shows must
now meet a higher minimum level of technical quality, and we have begun to
eliminate those programs not meeting this standard. We are also aggressively
seeking ideas for new programming content, while at the same time realizing
that we must remain true to our core audience. We also plan to re-brand the
channel with a new, more modern logo in the very near future and simultaneously
revamp the overall on-air look and feel of our channel.

Historically, we have contracted with third-party producers to
provide a majority of our programming. These third-party producers retain
ownership of the programming that we air and typically purchase from us a block
of the advertising time available during the airing of their programming which
they then resell to advertisers or use themselves. During 2006, we produced 28%
of the programming (excluding infomercials) we aired. In the future, we intend
to produce more in-house programming and acquire ownership of programs produced
by third parties by entering into exclusive, multi-year agreements. We believe this
will allow us to retain and sell more advertising time for our own account at
higher rates.

We plan to establish ourselves as the leading authority in outdoor
activities by launching our redesigned web site in the very near future. Our
new web site will include broadband delivery of much of our video programming
and provide the user with training and education regarding outdoor sports and
recreation as well as the equipment and gear used in such activities. We
believe that our new web site will allow us to offer enhanced opportunities for
our advertisers, and that by providing our content via broadband we can also
establish an increased demand for our channel in those markets not currently
receiving The Outdoor Channel in a widely distributed programming package or
tier.

We originally founded The Outdoor Channel in an attempt to more
effectively market our club organizations, the theme of which is the search for
small gold deposits and other treasure. In an effort to increase the membership
base of GPAA and Lost Dutchmans, we intend to continue to market to viewers of
The Outdoor Channel and by producing programs that are specifically directed
towards their interests. We will present to such viewers the benefits of
membership in GPAA and Lost Dutchmans while promoting subscriptions to our
Gold Prospector & Treasure Hunters in the Great Outdoors magazine. In
addition, we promote and market these two club organizations through direct
mail campaigns and our promotion and sponsorship throughout the country of
expositions dedicated to gold prospecting, treasure hunting and related
interests. We also offer introductory outings at our campsites in an effort to
increase membership sales in our national gold prospecting campground club and
to increase the number of participants attending our unique expeditions held
near Nome, Alaska and in the Motherlode area of California.

No single customer of ours accounts for greater than 10% of our
total revenue. Our revenues from The Outdoor Channel are derived primarily from
two sources, advertising fees and subscriber fees, as discussed below.

Short-form Advertising. We sell
short-form advertisements on The Outdoor Channel for commercial products
and services, usually in 30 second increments. The total inventory for our
short-form advertising consists of seven minutes per half hour. Of this
available advertising time, one minute is reserved for the local service
providers who may preempt the advertisement we insert into the program
with a local advertisement. Of the remaining six minutes, we either sell it to
advertisers for our own account or to third-party producers who then resell
this time to advertisers for their own account or use it themselves.

Advertisers
purchase from us the one minute of advertising time per half hour that is
reserved for the local service providers at a discount understanding that some
of the service providers will superimpose their own spots over the advertising
that we have inserted in the program, causing these advertisements to be seen
by less than all of the viewers of any program. All of this advertising time is
sold to direct response advertisers. Direct response advertisers rely on direct
appeals to our viewers to purchase products or services from toll-free
telephone numbers or websites and generally pay lower rates than national
advertisers.

For the
advertising time that we retain for our own account, we endeavor to sell this
time to national advertisers and their advertising agencies. The price we are
able to charge for this advertising time is dependent on market conditions,
perceived desirability of our viewers and, as estimated by Nielsen, the number
of households subscribing to The Outdoor Channel and actually viewing programs
(ratings). If we are unable to sell all of this advertising time to national
firms and agencies, we sell the remaining time to direct response advertisers.
We have been successful in increasing the amount of revenue generated from
national advertisers in the last two years. The majority of our revenue from
short-form advertising is a result of arrangements with advertising
agencies, for which we pay a commission. However, we have some relationships
with marketers who buy directly from us.

For the
advertising time that we sell to third-party producers, we receive revenue
directly from the producers. This revenue is often at a lower rate than we may have
received if we were to retain such time and sell it ourselves. The producers
then resell this advertising time to others or use this time to advertise their
own products or services.

Our advertising
revenue tends to reflect seasonal patterns of advertising expenditures, which
is common in the broadcast industry. Typically, our advertising revenue from
short-form advertising during the second quarter is greater than the first
quarter, and the fourth quarter is greater than the third quarter of each year.

Long-form Advertising. Long
form advertisements are infomercials that we typically run for
30 minutes, the majority of which are during the overnight hours. In the
future, we may reduce the programming time used for infomercials by
replacing it with traditional outdoor programming.

Cable and satellite service providers typically pay monthly
subscriber fees to us for the right to broadcast our channel. Our service
provider contracts typically range from 5 to 10 years and contain an annual
increase in the monthly subscriber fees we charge. Our contracts also contain
volume discounts for increased distribution by any one service provider. In
order to stimulate distribution growth, we plan to reduce per subscriber fees
somewhat over the next 3 years. At present our subscriber fees average less
than $0.10 per subscriber per month. We plan to reduce these fees somewhat over
the next 3 years as a stimulus to distribution growth.

We offer our programming in thematic blocks which, beginning
in January 2007, but subject to change as circumstance dictate, will be nightly programming blocks oriented
around the following themes: MondaysFishing;
TuesdaysBig Game Hunting; WednesdaysWestern Lifestyle/Shooting; ThursdaysBird
Hunting; FridaysOff-Road Motorsports; SaturdaysAdventure; and SundaysBig
Game Hunting.

Each nightly
programming environment is highlighted by a high-quality The Outdoor Channel
exclusive series that exemplifies the excitement of the individual genres:

·On
Mondays, viewers can look forward to the premiere of The Outdoor Channels
all-new adventure fishing series Speargun Hunter, featuring some of the worlds
best free divers in their incredibly dangerous pursuit of record-setting catch.
In addition to Speargun Hunter, the Monday night primetime fishing line-up also
includes new episodes of old favorites: In Fishermanwith Doug Stange and some
of North Americas finest fishing locations, and Hank Parkers Outdoor
Magazine, featuring tried-and-true techniques from the master angler.

·On
Tuesdays, fans of Big Game Hunting can tune into a line-up that features The
Outdoor Channels popular returning series Step Outside, with hosts Doug
Painter and two-time Olympic gold medalist Kim Rhode furthering the mission of
the National Shooting Sports Foundations (NSSF) Step Outside program as they
hunt some of North Americas prime locations. Step Outside is part of The
Outdoor Channels longest running programming block Tuesday Night Pursuits
presented by Mossy Oak Brand Camo. Mossy Oak is best known for its signature
program Hunting the Country, which has been part of The Outdoor Channels
Tuesday night lineup since 1999.

·Wednesdays
will feature a block of Shooting and Western Lifestyle programming including
The Outdoor Channels returning original, Cowboys, a celebration of all things
related to the Cowboy including world-class Cowboy Action shooting, historical
reenactments, and skills and crafts of the Old West. Pro rodeo from the PRCA
and CBR is also a Wednesday night staple.

·Thursdays
block features Bird Hunting and The Outdoor Channels exclusive series Turkey
Call, produced in association with the National Wild Turkey Federation (NWTF)
and hosted by Rob Keck, this returning favorite brings viewers the best in
turkey hunting throughout the world. Turkey Call joins Mossy Oaks Whistling
Wings to present some of the most exciting wing shooting adventures ever
captured.

·Friday
nights are Motorsports nights on The Outdoor Channel featuring Ride To
Adventure, a fast-paced series hosted by world famous adventurer Bill Baker and
regular coverage of major off-road races from The Best In The Desert series.
The rest of the Friday night lineup offers the latest and greatest of The
Outdoor Channels Off-Road motoring programs like Four Wheeler.

·Saturday
nights are now reserved for The Outdoor Channels Adventure series featuring
marine, aviation and snowmobile programming. Signature series include the
pioneering aviation program Wings To Adventure, hosted by Tom Gresham, and Personal
Watercraft Television, a high-energy half-hour hosted by Kevin Cullen that
presents the top events and latest equipment in the personal watercraft
industry.

·Hunting
programming wraps up The Outdoor Channels week on Sundays, featuring the
return of one of The Outdoor Channels longest running and most popular series,
Bass Pro Shops Outdoor World, showcasing top hunting pros like Brenda
Valentine, Jerry Martin, Bob Foulkrod, Walter Parrott and Alan Treadwell, among
others. Also debuting on Sundays is Whitewater Trails, hosted by popular
outdoorsman Bodie Owens providing one-of-a-kind tips, stories, and epic
adventures in some of the most pristine hunting and fishing locations
throughout the country.

12

In addition to the new primetime programming blocks,
starting in January horizontal strips of some of The Outdoor Channels
most popular shows from past seasons including Ultimate Match Fishing, Bass Pro
Shops Outdoor World Fishing, Getting Close, and Dream Season will air in daily
blocks from 2-4pm ESTas The Outdoor Channel shoots new episodes for a
fall debut. Viewers can also look forward to an all-fishing block of programs
on Saturday mornings from 8-11am EST, featuring past episodes of The
Outdoor Channel standards Bass Champs Tournament Trail, and Strike Kings Pro
Team Journal.

We either acquire or produce a program in-house or we license a
program from a third party. We have been producing in-house programs since our
founding in 1993. On average in 2006 we produced and aired on The Outdoor
Channel 26 regularly scheduled programs. Third-party programming license
agreements typically provide that the producers retain ownership of the
programming and that The Outdoor Channel is entitled to air each episode
several times per week for periods ranging from three months to three years.
Substantially all of our programming contracts with third parties allow us
exclusive U.S. rights and non-exclusive foreign rights during the term of
the licensing agreement. In 2006, we produced approximately 28%, by number of
titles, of our programs in-house and licensed the remaining 72% of our programs
from third-party producers.

Our sales and marketing efforts are focused on: (a) adding
subscribers both through improved positioning with those service providers
already carrying The Outdoor Channel and through new agreements with service
provider systems not currently carrying The Outdoor Channel, (b) increasing
demand from the viewing audience for both accessibility to The Outdoor Channel
and for viewership of our programming and (c) cultivating existing and
pursuing new advertising clients.

Generally, our sales and marketing efforts, to increase
distribution, focuses on developing strong relationships with existing and
potential cable and satellite service providers through multiple points of
contact including traditional sales visits, a dedicated customer service staff,
an active local event team and the use of a dedicated web site. In addition to
building strong relationships with our service providers, we are involved with
a wide variety of traditional marketing efforts including advertising in trade
publications, participating in industry trade shows, and supporting industry
related associations. We anticipate that the widespread adoption of the digital
and high definition products offered by our service providers will provide us
with additional opportunities to grow and develop The Outdoor Channel. In order
to strengthen the sales efforts of these service providers, we offer a wide variety
of market specific support including the opportunity to partner with local
outdoor clubs, local promotions, direct mail campaigns and integration into
existing consumer marketing initiatives.

We market The
Outdoor Channel to potential viewers to increase brand awareness and viewership
and to drive consumer requests for carriage, or for more accessible packaging,
by the service providers. These consumer-directed marketing efforts are
coordinated with and may be funded in part by the service providers.
These efforts often include traditional marketing campaigns consisting of
print, television and radio advertising. We also use our website to market and
promote The Outdoor Channel through schedule information, show synopses,
games and contests.

We have
relationships with a number of outdoor clubs and organizations which provide
opportunities for us to utilize their communication channels to reach their
membership with targeted marketing messages. These relationships also allow The
Outdoor Channel to be associated with organizations that have credibility and
relevance to outdoor enthusiasts. Examples of the clubs and organizations with
which

13

we have developed these relationships include National Rifle
Association, North American Hunting Club, North American Fishing Club and
the National Wild Turkey Federation.

We also have
relationships and sponsorships with the following special interest groups:
Congressional Sportsmens Foundation, National Shooting Sports Foundation,
Paralyzed Veterans of America, International Hunter Education Association,
International Association of Fish and Wildlife Agencies, U.S. Fish and
Wildlife Service and Farmers and Hunters Feeding the Hungry.

In addition, we purchase advertisements in magazines that
specialize in content similar to The Outdoor Channel. We currently advertise in
approximately 80 consumer publications, including American Rifleman, Buckmasters Whitetail, Dirt Rider,
Fly Fisherman, Guns & Ammo, and Safari Times.

Sales and distribution of The Outdoor Channels advertising time
are conducted by The Outdoor Channels in-house sales personnel. In 2002, we
began to subscribe to Nielsens services, and the availability of this
information has become a critical tool in attracting advertisers. Our sales team
sells directly to national advertising accounts, and continuously monitors
available spots in an effort to maximize advertising revenue. To increase our
visibility in the advertising community, we advertise in trade publications and
on trade web sites directed toward advertising executives.

In addition to The Outdoor Channel, we own and operate
related businesses that serve the interests of The Outdoor Channel viewers and
other outdoor enthusiasts. These related businesses include Gold Prospectors
Association of America LLC, or GPAA, and LDMA-AU, Inc., or Lost Dutchmans.

We believe GPAA is one of the largest gold prospecting
clubs in the world. GPAAs members currently pay an initial membership fee of
$79 and annual renewal fees ranging between $24 and $54. GPAA sells products
and services related to gold prospecting and is the publisher of the Gold
Prospectors & Treasure Hunters in the Great Outdoors magazine.

Lost Dutchmans is a national gold prospecting
campground club with properties in Arizona, California, Colorado, Georgia,
Michigan, Nevada, North Carolina, Oregon and South Carolina. Lost Dutchmans
members currently pay a membership fee ranging between $3,500 and $3,750 and an
annual maintenance fee of $120. Members are entitled to use any of the
campgrounds we own or have rights to use and are entitled to keep all gold
found while prospecting on any of these properties.

We also offer unique
expeditions where participants enjoy gold prospecting and other outdoor
activities. The expeditions include annual expeditions to the heart of the
historic Motherlode area in central California and the camp on our 2,300-acre
property along the Cripple River which empties into the Bering Sea near Nome,
Alaska. Participants pay on a per-expedition basis.

Financial information related to our operating segments is
included in Note 13 to the consolidated financial statements included in
this Form 10-K, which note is incorporated by reference herein. The
Outdoor Channel, or TOC, segment has provided 87.8%, 87.5% and 86.6% of our
consolidated revenue during the years ended December 31, 2006, 2005 and
2004, respectively.

We compete with
other television channels for distribution, audience viewership and advertising
sales.

14

The Outdoor
Channel competes with other television channels to be included in the offerings
of each system provider and for placement in the packaged offerings having the
most subscribers. In addition, each television channel focusing on a particular
form of content competes directly with other channels offering similar
programming. In the case of The Outdoor Channel, we compete for distribution
and viewers with other television networks aimed at our own target audience
which we believe consists primarily of males between the ages of 25 and 54. We
believe such competitors include Versus (formerly OLN), Spike TV, ESPN and
others. It is possible that these or other competitors, many of which have
substantially greater financial and operational resources than us, could revise
their programming to offer more traditional outdoor activities such as hunting,
fishing, shooting and other topics which are of interest to our viewers.

Certain
technological advances, including the increased deployment of fiber optic
cable, are expected to allow cable systems to greatly expand their present
channel capacity. Such added capacity leaves room for additional
programming of all types which could dilute our market share by enabling the
emergence of channels with programming similar to that offered by The Outdoor
Channel and lead to increased competition for viewers from existing or new
channels.

We also compete
with television networks that generally have large subscriber bases and
significant investments in, and access to, competitive programming sources. In
addition, large cable companies have the financial and technological resources
to create and distribute their own channels. For instance, Versus (VS) is
owned and operated by Comcast, the largest MSO in the U.S. We believe that
while VS currently offers some blocks of similar programs, there is a
substantial difference between the two networks. The Outdoor Channel emphasizes
traditional outdoor activities, such as fishing and hunting, while VS currently
features a significant amount of programming concerning competitive, or
extreme, sports. As The Outdoor Channel becomes more established, however, it
is possible that other channels may attempt to offer programming similar to
ours. For example, The Sportsmans Channel and Mens Outdoor and Recreation
network have already begun offering programming similar to ours.

We compete for
advertising revenue with other pay television networks, broadcast networks, and
local over-the-air television stations. In addition, we compete for advertisers
with other forms of advertising such as satellite and broadcast radio and the
print media. We believe that many of these advertising avenues may not
permit an advertiser to target the specific demographic audience who watches
The Outdoor Channel.

While Lost Dutchmans has numerous campground competitors, we
believe it is the largest campground club in the United States that has a gold
prospecting theme. Campgrounds compete primarily by quality of facilities and
amenities offered. Lost Dutchmans has rustic facilities and few amenities and
seeks to attract persons who are interested in gold prospecting and hands-on
outdoor activities and who wish to be part of an informal family-oriented
environment. We are not aware of any national direct competitor for our gold
prospecting club GPAA, although in a broad sense both GPAA and Lost Dutchmans
compete with other sources of recreational activities. Lost Dutchmans and GPAA
both compete primarily through marketing and promotional activities involving
expositions, advertisements and shows on The Outdoor Channel, reaching
prospective members through our Gold
Prospectors & Treasure Hunters in the Great Outdoorsmagazine and other marketing
activities.

Outdoor Channel Holdings, Inc. was originally incorporated in
Alaska in 1984. On September 8, 2004, we acquired all of the outstanding
shares of The Outdoor Channel, Inc. that we did not previously own.
Effective September 15, 2004 we reincorporated from Alaska into Delaware.

As of February 1,
2007, we had a total of 138 employees of which 134 were full time. None of our
employees are covered by a collective bargaining agreement. We consider our
relationship with our employees to be good.

Our operations are subject
to various government regulations. The operations of cable television systems,
satellite distribution systems and broadcast television stations also are
subject to the Communications Act of 1934, as amended, and to regulatory
supervision by the FCC. Our uplink facility in Temecula, California is licensed
by the FCC and must be operated in conformance with the terms and conditions of
that license. The license is also subject to periodic renewal and ongoing
regulatory requirements.

Cable television systems that carry our programming
are regulated by municipalities or other local or state government authorities
which have the jurisdiction to grant and to assign franchises and to negotiate
generally the terms and conditions of such franchises, including rates for
basic service charged to subscribers, except to the extent that such
jurisdiction is preempted by federal law. Any such rate regulation could place
downward pressure on the potential subscriber fees we can earn.

In 1992, Congress enacted the Cable Television
Consumer Protection and Competition Act of 1992, or the 1992 Cable Act, which
provides, among other things, for a must-carry or retransmission consent
regime for local broadcast stations, requiring carriage of certain broadcast
stations and consideration to other broadcast stations for retransmission of
their signals. The Cable Communication Policy Act of 1984 requires cable
television systems with 36 or more activated channels to reserve a percentage
of such channels for commercial use by unaffiliated third parties and permits
franchise authorities to require channel capacity, equipment and facilities for
public educational and government access channels.

In response to the 1992 Cable Act, the FCC adopted
regulations prohibiting programmers in which cable operators have an attributable
interest from discriminating between cable operators and their competitors, or
among cable operators, and for increased competition in video programming
distribution (both within the cable industry and between cable and competing
video distributors). The 1992 Cable Act also directed the FCC to adopt
regulations limiting the percentage of nationwide subscribers any one cable
system operator may serve and the carriage by cable systems and other video
distributors of affiliated programming services. Although the FCC adopted such
regulations, they were invalidated by a United States Court of Appeals in 2001.
The FCC subsequently initiated rulemaking proceedings which remain pending.

In addition, the 1992 Cable Act requires the FCC to
establish regulations for the rates that cable operators subject to rate
regulation may charge for basic cable service and certain other services.
Rates are not regulated for cable systems which are subject to effective
competition, as defined in the FCCs regulations. The 1992 Cable Act also
directed the FCC to establish guidelines for determining when cable programming
may not be provided exclusively to cable operators. The FCCs implementing
regulations preclude virtually all exclusive programming contracts between
cable operators and satellite programmers affiliated with any cable operator
(unless the FCC first determines the contract serves the public interest) and
generally prohibit a cable operator that has an attributable interest in a
satellite programmer from improperly influencing the terms and conditions of
sale to unaffiliated multi-channel video programming

16

distributors. The FCC has
initiated a rulemaking proceeding regarding the possible extension of the
exclusive contracting prohibition, which is scheduled to expire on October 5,
2007.

In 1996, Congress enacted a comprehensive rewrite of
telecommunications law, modifying many of the provisions of the 1992 Cable Act.
Among other things, the legislation allows the cable and telephone industries
to compete in each others markets and phased out federal cable rate regulation
of non-basic services, such as the rates charged by cable operators to
subscribers for the tiers in which our programming typically is carried. It
also required the FCC to establish rules ensuring that video programming
is fully accessible to the hearing impaired through closed captioning. The rules adopted
by the FCC require substantial closed captioning over a six to ten year
phase-in period, which began in 2000, with only limited exceptions.

Congress and the FCC may,
in the future, adopt new laws, regulations and policies regarding a wide
variety of matters which could affect The Outdoor Channel. We are unable to
predict the outcome of future federal legislation, regulation or policies, or
the impact of any such laws, regulations or policies on The Outdoor Channels
operations.

To operate our campgrounds
and mining sites, we must obtain discretionary permits or approvals issued by
local governments under local zoning ordinances and other state laws. In
addition, to construct improvements we have usually been required to obtain
permits such as building and sanitary sewage permits. Some states in which we
sell memberships have laws regulating campground memberships. These laws
sometimes require comprehensive disclosure to prospective purchasers. Some
states have laws requiring us to register with a state agency and obtain a
permit to market.

In addition to the
regulations applicable to the cable television and gold mining industries in
general, we are also subject to various local, state and federal regulations,
including, without limitation, regulations promulgated by federal and state
environmental, health and labor agencies. In addition, our mining clubs are
subject to various local, state and federal statutes, ordinances, rules and
regulations concerning, zoning, development, and other utilization of its
properties.

The Outdoor Channel® is a registered trademark,
and Outdoor Channel 2 HDSM is
a service mark, of The Outdoor Channel, Inc. We have also filed for
registration of other trademarks, none of which we consider material at this
time. In addition, we rely on copyright protection of those programs that we
own.

We file annual, quarterly and current reports, proxy
statements and other information with the Securities and Exchange Commission.
You may read and copy any materials we have filed with the Securities and
Exchange Commission at the Securities and Exchange Commissions Public
Reference Room at 450 Fifth Street, N.W., Washington, D.C. 20549. Please
call the Securities and Exchange Commission at 1-800-SEC-0330
for further information on the Public Reference Room. The Securities and
Exchange Commission also maintains a web site at http://www.sec.gov that
contains reports, proxy and information statements and other information
concerning issuers that file electronically with the Securities and Exchange
Commission, including us. Our common stock is listed on The Nasdaq Global
Market. We also maintain an internet site at
http://www.outdoorchannelholdings.com that contains information concerning us. Information
included or referred to on our website is not incorporated by reference in or
otherwise a part of this report.

17

You may obtain a free
copy of our annual reports on Form 10-K, quarterly reports on Form 10-Q
and current reports on Form 8-K and amendments to those reports on
the day of filing with the Securities and Exchange Commission on our website on
the World Wide Web at http://www.outdoorchannelholdings.com. We will also
provide without charge, upon written or oral request, a copy of any or all of
the documents referred to above. Requests for such documents should be directed
to Attention: General Counsel, 43445 Business Park Drive, Suite 113,
Temecula, California 92590 (Telephone: (951) 699-4749).

ITEM 1A.RISK FACTORS.

Our business and operations
are subject to a number of risks and uncertainties, and the following list
should not be considered to be a definitive list of all factors that
may affect our business, financial condition and future operating results
and should be read in conjunction with the risks and uncertainties, including
risk factors, contained in our other filings with the Securities and Exchange
Commission. Any forward-looking statements made by us are made with the
intention of obtaining the benefits of the safe harbor provisions of the
Securities Litigation Reform Act and a number of factors, including, but
not limited to those discussed below, could cause our actual results and
experiences to differ materially from the anticipated results or expectations
expressed in any forward-looking statements.

Our ability to sell
advertising is largely dependent on the size of our subscriber base and
television ratings estimated by Nielsen. We do not control the methodology used
by Nielsen for these estimates, and estimates regarding The Outdoor Channels
subscriber base made by Nielsen is theirs alone and does not represent
opinions, forecasts or predictions of Outdoor Channel Holdings, Inc. or
its management. Outdoor Channel Holdings, Inc. does not by its reference
to Nielsen or distribution of the Nielsen Universe Estimate imply its endorsement
of or concurrence with such information. In particular, we believe that we may
be subject to a wider difference between the number of subscribers as estimated
by Nielsen and the number of subscribers reported by our cable and satellite
MSOs than is typically expected because we are not fully distributed and are
sometimes carried on poorly penetrated tiers. In addition, if Nielsen modifies
its methodology or changes the statistical sample it uses for these estimates,
such as the demographic characteristics of the households, the size of our
subscriber base and our ratings could be negatively affected resulting in a
decrease in our advertising revenue.

The success of The Outdoor
Channel is dependent, in part, on our ability to enter into new carriage
agreements and maintain existing agreements or arrangements with, and carriage
by, satellite systems and multiple system operators, which we refer to as
MSOs, affiliated regional or individual cable systems. Although we currently
have arrangements or agreements with, and are being carried by, all the largest
MSOs and satellite service providers, having such relationship or agreement
with a MSO does not ensure that an MSOs affiliated regional or individual cable
systems will carry or continue to carry The Outdoor Channel or that the
satellite service provider will carry our channel. Under our current contracts
and arrangements, The Outdoor Channel typically offers satellite systems and
cable MSOs, along with their cable affiliates, the right to broadcast The
Outdoor Channel to their subscribers, but such contracts or arrangements do not
require that The Outdoor Channel be offered to all subscribers of, or any tiers
offered by, the service provider. Because certain carriage arrangements do not
specify on which service levels The Outdoor Channel is carried, such as analog
versus basic digital, expanded digital or specialty

18

tiers,
and in which geographic markets The Outdoor Channel will be offered, we have no
assurance that The Outdoor Channel will be carried and available to viewers of
any particular MSO or to all satellite subscribers. In addition, if we are
unable to fully comply with the terms of such agreements, the service providers
could discontinue carrying The Outdoor Channel. Lastly, we are currently not
under any long-term contract with some of the service providers that are
currently distributing our channel. Our distribution agreements with six of the
major service providers, accounting for approximately 59% of our subscriber
base as of August 2006, will have terminated as of May 1, 2007. If we
are unable to renew these distribution agreements, we could lose a substantial
number of subscribers. If cable and satellite service providers discontinue or
refrain from carrying The Outdoor Channel, or decide to not renew our distribution
agreement with them, this could reduce the number of viewers and harm our
operating results.

A major component of our
growth strategy is based on increasing the number of subscribers to our
channels. Growing our subscriber base depends upon many factors, such as the
success of our marketing efforts in driving consumer demand for our channels;
overall growth in cable and satellite subscribers; the popularity of our
programming; our ability to negotiate new carriage agreements, or amendments
to, or renewals of, current carriage agreements, and maintain existing
distribution; plus other factors that are beyond our control. There can be no
assurance that we will be able to maintain or increase the subscriber base of
our channels on cable and satellite systems or that our current carriage will
not decrease as a result of a number of factors or that we will be able to
maintain our current subscriber fee rates. In particular, negotiations for new
carriage agreements, or amendments to, or renewals of, current carriage
agreements, are lengthy and complex, and we are not able to predict with any
accuracy when such increases in our subscriber base may occur, if at all,
of if we can maintain our current subscriber fee rates. If we are unable to
grow our subscriber base, our subscriber and advertising revenues may not
increase and could decrease. In addition, as we plan and prepare for such
projected growth in our subscriber base, we plan to increase our expenses
accordingly. If we are not able to increase our revenue to offset these
increased expenses, and if our subscriber fee revenue decreases, our
profitability could decrease.

Although we currently have
plans to offer incentives to service providers in an attempt to increase the
number of our subscribers, we may not be able to do so economically or at
all. If we are unable to increase the number of our subscribers on a
cost-effective basis, or if the benefits of doing so do not materialize, our
business and operating results would be harmed. In particular, it may be
necessary to reduce our subscriber fees in order to grow our subscriber base. In
addition, if we make any upfront cash payments to service providers for an
increase in our subscriber base, our cash flow could be adversely impacted, and
we may incur negative cash flow for some time. In addition, if we were to
make such upfront cash payments or provide other incentives to service
providers, we expect to amortize such amounts ratably over the term of the
agreements with the service providers. However, if a service provider
terminates any such agreement prior to the expiration of the term of such
agreement, then under current accounting rules we may incur a large
expense in that quarter in which the agreement is terminated equal to the
remaining un-amortized amounts and our operating results could accordingly be
adversely affected. In addition, if we offer equity incentives, the terms and
amounts of such equity may not be favorable to us or our stockholders.

19

If, in our attempt to increase our number of
subscribers, we structure favorable terms or incentives with one service
provider in a way that would require us to offer the same terms or incentives
to all other service providers, our operating results may be harmed.

Many of our existing
agreements with cable and satellite service providers contain most favored
nation clauses. These clauses typically provide that if we enter into an
agreement with another service provider on more favorable terms, these terms
must be offered to the existing service provider, subject to some exceptions
and conditions. Future agreements with service providers may also contain
similar most favored nation clauses. If, in our attempt to increase our
number of subscribers, we reduce our subscriber fees or structure launch
support fees or other incentives to effectively offer more favorable terms to
any service provider, these clauses may require us to offer similar
incentives to other service providers or reduce the effective subscriber fee
rates that we receive from other service providers, and this could negatively
affect our operating results.

We do not control the
channels with which our channel is packaged by cable or satellite service
providers. The placement by a cable or satellite service provider of our
channel in unpopular program packages could reduce or impair the growth of the
number of our viewers and subscriber fees paid by service providers to us. In
addition, we do not set the prices charged by cable and satellite service
providers to their subscribers when our channel is packaged with other
television channels. The prices for the channel packages in which our channel is
bundled may be set too high to appeal to individuals who might otherwise
be interested in our network. Further, if our channel is bundled by service
providers with networks that do not appeal to our viewers or is moved to
packages with fewer subscribers, we may lose viewers. These factors
may reduce the number of viewers of our channel, which in turn would
reduce our subscriber fees and advertising revenue.

Cable and satellite
operators continue to consolidate, making The Outdoor Channel increasingly
dependent on fewer operators. If these operators fail to carry The Outdoor
Channel, use their increased distribution and bargaining power to negotiate
less favorable terms of carriage or to obtain additional volume discounts, our
business and operating results would suffer.

We have undergone rapid
and significant growth in revenue and subscribers over the last several years.
There are risks inherent in rapid growth and the pursuit of new strategic
objectives, including among others: investment and development of appropriate
infrastructure, such as facilities, information technology systems and other
equipment to support a growing organization; hiring and training new
management, sales and marketing, production, and other personnel and the
diversion of managements attention and resources from critical areas and
existing projects; and implementing systems and procedures to successfully
manage growth, such as monitoring operations, controlling costs, maintaining
effective quality and service, and implementing and maintaining adequate
internal controls. Although we have recently moved into our new Temecula,
California broadcast facility, we expect that additional expenditures will be
required as we continue to upgrade our facilities. We cannot assure you that we
will be able to successfully manage our growth, that future growth will occur
or that we will be successful in managing our business objectives. We can
provide no assurance that our profitability or revenues will not

20

be
harmed by future changes in our business. Our operating results could be harmed
if such growth does not occur, or is slower or less profitable than projected.

Our ability to secure additional
national advertising accounts, which generally pay higher advertising rates,
depends upon the size of our audience, the popularity of our programming and
the demographics of our viewers, as well as strategies taken by our
competitors, strategies taken by advertisers and the relative bargaining power
of advertisers. Competition for national advertising accounts and related
advertising expenditures is intense. We face competition for such advertising
expenditures from a variety of sources, including other cable network companies
and other media. We cannot assure you that our sponsors will pay advertising
rates for commercial air time at levels sufficient for us to make a profit or
that we will be able to attract new advertising sponsors or increase advertising
revenues. If we are unable to attract national advertising accounts in
sufficient quantities, our revenues and profitability may be harmed.

We have found a material weakness in our internal
controls over financial reporting and we cannot be certain in the future that
we will be able to report that our controls are without material weakness or to
complete our evaluation of those controls in a timely fashion.

Pursuant to Section 404 of the Sarbanes-Oxley Act of
2002 ("Section 404"),and the rules
and regulations promulgated by the SEC to implement Section 404, we are
required to include in our Form 10-K an annual report by our management
regarding the effectiveness of our internal control over financial reporting.The report includes,
among other things, an assessment of the effectiveness ofour
internal control over financial reporting as of the end of our fiscal year.This assessment must
include disclosure of any material weaknesses in ourinternal
control over financial reporting identified by management.As of December 31, 2006, our
internal control over financial reporting wasineffective
due to the presence of a material weakness, as more fully describedin Item 9A of this Form 10-K. We are actively working to correct this
material weakness, which will continue until we are able to hire additional
staff in our accounting department and successfully operate and test our
controls with such staff in place.

If we fail to maintain an effective system of
disclosure controls or internalcontrol over financial
reporting, we may discover material weaknesses that wewould
then be required to disclose. We may not be able to accurately or timelyreport on our financial results, and we might be subject to
investigation by regulatory authorities.
This could result in a loss of investor confidencein
the accuracy and completeness of our financial reports, which may have anadverse effect on our stock price.

In
addition, all internal control systems, no matter how well designed, have
inherent limitations. Therefore, even those systems determined to be effective
can provide only reasonable assurance with respect to the preparation and
presentation of financial statements. Projections of any evaluation of controls
effectiveness to future periods are subject to risks. Over time, controls may
become inadequate because of changes in conditions or deterioration in the
degree of compliance with policies or procedures.

We are required to pay
income taxes in various states in which we conduct our business operations. In
the past, we had paid state income taxes only in California (where our
headquarters is located) and had not paid income taxes to any other state. We
have determined that we may have state income tax liability in the eight
states other than California in which our gold prospecting properties are
located and have filed income tax returns in those states for past years. In
general, we believe any income taxes paid to states other than California will
be partially offset by a refund from the State of California for income tax
amounts we have overpaid to California in past years. We may, however, be
limited as to the number of

21

years
for which we can receive a refund from California for taxes previously paid,
and we cannot predict when we would receive any such refund. In addition,
because each state to which we may owe outstanding income taxes has a
different methodology for calculating tax owed and a different tax rate, our
aggregate state income tax liability could be greater than what we have paid to
California in prior years. Our aggregate state income tax liability, on which
we may owe accrued interest and penalties, could be material to our
results of operations

Expenses relating to programming costs are generally
increasing and a number of factors can cause cost overruns and delays, and our
operating results may be adversely impacted if we are not able to
successfully recover the costs of developing and acquiring new programming.

The average cost of
programming has increased recently for the cable industry and such increases
may continue. We plan to build our programming library through the
acquisition of long-term broadcasting rights from third party producers,
in-house production and outright acquisition of programming, and this
may lead to increases in our programming costs. The development,
production and editing of television programming requires a significant amount
of capital and there are substantial financial risks inherent in developing and
producing television programs. Actual programming and production costs
may exceed their budgets. Factors such as labor disputes, death or
disability of key spokespersons or program hosts, damage to film negatives,
master tapes and recordings or adverse weather conditions may cause cost
overruns and delay or prevent completion of a project. If we are not able to
successfully recover the costs of developing or acquiring programming through
increased revenues, whether the programming is produced by us or acquired from
third-party producers, our business and operating results will be harmed.

In July 2005, we
launched an all new, all native high definition network called Outdoor Channel
2 HD. There can be no assurance that Outdoor Channel 2 HD will not incur
unexpected costs and expenses. Distribution of Outdoor Channel 2 HD will depend
on successfully executing new or amended distribution agreements with cable and
satellite service providers. There can be no assurance that such agreements can
be made, and if they are made, that they will be on terms favorable to us or
that they will not require us to grant periods of free service and/or marketing
commitments to encourage carriage. The public may not adopt HD consumer
television equipment in numbers sufficient to allow profits for an
advertiser-supported service. Bandwidth constraints may keep Outdoor
Channel 2 HD from achieving sufficient distribution from service providers to
reach profitability. Competition for quality HD content may increase the
costs of programming for Outdoor Channel 2 HD beyond our control or
expectations. All of these factors, combined or separately, could increase
costs or restrain revenue and adversely affect our operating results.

Our operations are
influenced by many factors. These factors may cause our financial results
to vary significantly in the future and our operating results may not meet
the expectations of securities analysts or investors. If this occurs, the price
of our stock may decline. Factors that can cause our results to fluctuate
include, but are not limited to:

·carriage
decisions of cable and satellite service providers;

·demand
for advertising, advertising rates and offerings of competing media;

·changes
in the growth rate of cable and satellite subscribers;

22

·cable
and satellite service providers capital and marketing expenditures and their
impact on programming offerings and penetration;

·the
mix of cable television and satellite-delivered programming products and
services sold and the distribution channels for those products and services;

·our
ability to react quickly to changing consumer trends;

·specific
economic conditions in the cable television and related industries; and

·changing
regulatory requirements.

Due to the foregoing and
other factors, many of which are beyond our control, our revenue and operating
results vary from period to period and are difficult to forecast. Our expense
levels are based in significant part on our expectations of future
revenue. Therefore, our failure to meet revenue expectations would seriously
harm our business, operating results, financial condition and cash flows.
Further, an unanticipated decline in revenue for a particular calendar quarter
may disproportionately affect our profitability because our expenses would
remain relatively fixed and would not decrease correspondingly.

We prepare our financial statements to conform to
generally accepted accounting principles (GAAP), which are subject to
interpretations by the Financial Accounting Standards Board, the Securities and
Exchange Commission and various bodies formed to interpret and create
appropriate accounting policies. A change in those policies can have a
significant effect on our reported results and may even affect our
reporting of transactions completed before a change is announced. Accounting
policies affecting many other aspects of our business, including
rules relating to business combinations and employee stock option grants,
have recently been revised or are under review. Changes to those rules or
the questioning of current practices may adversely affect our reported
financial results or the way we conduct our business. In addition, our
preparation of financial statements in accordance with GAAP requires that we
make estimates, judgments and assumptions that affect the recorded amounts of
assets and liabilities, disclosure of those assets and liabilities at the date
of the financial statements and the recorded amounts of revenue and expenses
during the reporting period. A change in the facts and circumstances
surrounding those estimates, including the interpretation of the terms and
conditions of our contractual obligations, could result in a change to our
estimates and could impact our operating results.

Our operating results
depend significantly upon the generation of advertising revenue. Our ability to
generate advertising revenues is largely dependent on our Nielsen ratings,
which estimates the number of viewers of The Outdoor Channel, and this directly
impacts the level of interest of advertisers and rates we are able to charge.
If we fail to program popular shows that maintain or increase our current
number of viewers, our Nielsen ratings could decline, which in turn could cause
our advertising revenue to decline and adversely impact our business and
operating results. In addition, if we fail to program popular shows the number
of subscribers to our channel may also decrease, resulting in a decrease
in our subscriber fee and advertising revenue.

We compete for viewers with other pay cable television
and broadcast networks, including Versus (formerly OLN), Spike TV, ESPN2 and
others. If these or other competitors, many of which have substantially greater
financial and operational resources than us, significantly expand their
operations with respect to outdoor-related programming or their market penetration,
our business could be harmed. In addition, certain technological advances,
including the deployment of fiber optic cable, which are already substantially
underway, are expected to allow cable systems to greatly expand their current
channel capacity, which could dilute our market share and lead to increased
competition for viewers from existing or new programming services.

We also compete with
television network companies that generally have large subscriber bases and
significant investments in, and access to, competitive programming sources. In
some cases, we compete with cable and satellite service providers that have the
financial and technological resources to create and distribute their own
television networks, such as Versus, which is owned and operated by Comcast. In
order to compete for subscribers, we may be required to reduce our subscriber
fee rates or pay either launch fees or marketing support or both for
carriage in certain circumstances in the future which may harm our
operating results and margins. We may also issue our securities from time
to time in connection with our attempts for broader distribution of The Outdoor
Channel and the number of such securities could be significant. We compete for
advertising sales with other pay television networks,

24

broadcast
networks, and local over-the-air television stations. We also compete for
advertising sales with satellite and broadcast radio and the print media. We
compete with other cable television networks for subscriber fees from, and
affiliation agreements with, cable and satellite service providers. Actions by
the Federal Communications Commission, which we refer to as the FCC, and the
courts have removed certain of the impediments to entry by local telephone
companies into the video programming distribution business, and other
impediments could be eliminated or modified in the future. These local
telephone companies may distribute programming that is competitive with
the programming provided by us to cable operators.

The Sarbanes-Oxley Act of
2002 required us to change or supplement some of our corporate governance and securities
disclosure and compliance practices. The Securities and Exchange Commission and
NASDAQ have revised, and continue to revise, their regulations and listing
standards. These developments have increased, and may continue to
increase, our legal compliance and financial reporting costs.

Our ability to attract new
members and retain existing members in our club organizations, GPAA and Lost
Dutchmans, depends, in part, upon our marketing efforts, including our
programming on The Outdoor Channel and such other efforts as direct mail
campaigns, continued sponsorship of expositions dedicated to gold prospecting,
treasure hunting and related interests around the country and introductory
outings held at our campsites. We cannot assure you that we will successfully
attract new members or retain existing members. A decline in membership in our
club organizations could harm our business and operating results.

Our ability to deliver programming
to service providers, and their subscribers, is dependent upon the satellite
equipment and software that we use to work properly to distribute our
programming. If this satellite system fails, or a signal with a higher priority
replaces our signal, which is determined by our agreement with the owner of the
satellite, we may not be able to deliver programming to our cable and
satellite service provider customers and their subscribers within the time
periods advertised. We have negotiated for back-up capability with our
satellite provider on an in-orbit spare satellite, which provides us carriage
on the back-up satellite in the event that catastrophic failure occurs on the
primary satellite. Our contract provides that our main signal is subject to preemption
and until the back-up satellite is in position, we could lose our signal for a
period of time. A loss of our signal could harm our reputation and reduce our
revenues and profits.

Our systems and operations
may be vulnerable to damage or interruption from earthquakes, floods,
fires, power loss, telecommunication failures and similar events. They also
could be subject to break-ins, sabotage and intentional acts of vandalism.
Since our production facilities for The Outdoor Channel are all located in
Temecula, California, the results of such events could be particularly
disruptive because we do not have readily available alternative facilities from
which to conduct our business. Our business interruption insurance may not
be sufficient to compensate us for losses that may occur. Despite any
precautions we may take, the occurrence of a natural disaster or other
unanticipated problems at our

25

facilities
could result in interruptions in our services. Interruptions in our service
could harm our reputation and reduce our revenues and profits.

Seasonal trends are likely
to affect our viewership, and consequently, could cause fluctuations in our
advertising revenues. Our business reflects seasonal patterns of advertising
expenditures, which is common in the broadcast industry. For this reason,
fluctuations in our revenues and net income could occur from period to period
depending upon the availability of advertising revenues. Due, in part, to these
seasonality factors, the results of any one quarter are not necessarily
indicative of results for future periods, and our cash flows may not correlate
with revenue recognition.

Our future capital and
subscriber growth requirements will depend on numerous factors, including the
success of our efforts to increase advertising revenues, the amount of
resources devoted to increasing distribution of The Outdoor Channel, and
acquiring and producing programming for The Outdoor Channel. As a result, we could
be required to raise substantial additional capital through debt or equity
financing or offer equity as an incentive for increased distribution. To the
extent that we raise additional capital through the sale of equity or
convertible debt securities, or offer equity incentives for subscriber growth,
the issuance of such securities could result in dilution to existing
stockholders. If we raise additional capital through the issuance of debt
securities, the debt securities would have rights, preferences and privileges
senior to holders of common stock and the terms of such debt could impose
restrictions on our operations. We cannot assure you that additional capital,
if required, will be available on acceptable terms, or at all. If we are unable
to obtain additional capital, or must offer equity incentives for subscriber
growth, our current business strategies and plans and ability to fund future
operations may be harmed.

Our success depends to a
significant degree upon the continued contributions of the principal members of
our sales, marketing, production and management personnel, many of whom would
be difficult to replace. Other than our CEO, Roger L. Werner, Jr., none of
our employees are under contract and all of our employees are at-will. Any of
our officers or key employees could leave at any time, and we do not have key
person life insurance policies covering any of our employees. The competition
for qualified personnel has been strong in our industry. This competition could
make it more difficult to retain our key personnel and to recruit new highly
qualified personnel. The loss of Perry T. Massie, our Chairman of the
Board, Roger L. Werner, Jr., our CEO and President, Thomas H. Massie, our
Executive Vice President, William A. Owen, our Chief Financial Officer, or
Thomas E. Hornish, our COO and General Counsel, could adversely impact our
business. To attract and retain qualified personnel, we may be required to
grant large option or other share-based incentive awards, which may be
highly dilutive to existing stockholders. We may also be required to pay
significant base salaries and cash bonuses to attract and retain these
individuals, which payments could harm our operating results. If we are not
able to attract and retain the necessary personnel we may not be able to
implement our business plan.

A number of new personal
video recorders, such as TiVo® in the United
States, have emerged in recent years. These recorders often contain features
allowing viewers to watch pre-recorded programs without watching advertising.
The effect of these recorders on viewing patterns and exposure to advertising
could harm our operations and results if our advertisers reduce the advertising
rates they are willing to pay because they believe television advertisements
are less effective with these technologies.

The delivery of
subscription programming requires the use of conditional access technology to
limit access to programming to only those who subscribe to programming and are
authorized to view it. Conditional access systems use, among other things,
encryption technology to protect the transmitted signal from unauthorized
access. It is illegal to create, sell or otherwise distribute software or
devices to circumvent conditional access technologies. However, theft of cable
and satellite programming has been widely reported, and the access or smart
cards used in cable and satellite service providers conditional access systems
have been compromised and could be further compromised in the future. When
conditional access systems are compromised, we do not receive the potential
subscriber fee revenues from the cable and satellite service providers.
Further, measures that could be taken by cable and satellite service providers
to limit such theft are not under our control. Piracy of our copyrighted
materials could reduce our revenue from subscriber fees and advertising and
negatively affect our business and operating results.

Currently approximately
72% of programs we air (exclusive of infomercials) on The Outdoor Channel are
provided by third-party television and film producers. In order to build a
library of programs and programming distribution rights, we must obtain all of
the necessary rights, releases and consents from the parties involved in
developing a project or from the owners of the rights in a completed program.
There can be no assurance that we will be able to obtain the necessary rights
on acceptable terms, or at all, or properly maintain and document such rights.
In addition, protecting our intellectual property rights by pursuing those who
infringe or dilute our rights can be costly and time consuming. If we are
unable to protect our portfolio of trademarks, service marks, copyrighted
material and characters, trade names and other intellectual property rights,
our business and our ability to compete could be harmed.

Other parties may assert
intellectual property infringement claims against us, and our products
may infringe the intellectual property rights of third parties. From time
to time, we receive letters alleging infringement of intellectual property
rights of others. Intellectual property litigation can be expensive and
time-consuming and could divert managements attention from our business. If
there is a successful claim of infringement against us, we may be required
to pay substantial damages to the party claiming infringement or enter into
royalty or license agreements that may not be available on acceptable or
desirable terms, if at all. Our failure to license the proprietary rights on a
timely basis would harm our business.

Our current officers,
directors and greater than 5% stockholders together currently control greater
than 50% of our outstanding common stock. As a result, these stockholders,
acting together, would be able to exert significant influence over all matters
requiring stockholder approval, including the election of directors and
approval of significant corporate transactions. In addition, this concentration
of ownership may delay or prevent a change in control of our company, even
when a change may be in the best interests of stockholders. In addition,
the interests of these stockholders may not always coincide with our
interests as a company or the interests of other stockholders. Accordingly,
these stockholders could cause us to enter into transactions or agreements that
you would not approve.

Our stock has historically
been and continues to be traded at relatively low volumes and therefore has
been subject to price volatility. Various factors contribute to the volatility
of our stock price, including, for example, low trading volume, quarterly
variations in our financial results, increased competition and general economic
and market conditions. While we cannot predict the individual effect that these
factors may have on the market price of our common stock, these factors,
either individually or in the aggregate, could result in significant volatility
in our stock price during any given period of time. There can be no assurance
that a more active trading market in our stock will develop. As a result,
relatively small trades may have a significant impact on the price of our
common stock. Moreover, companies that have experienced volatility in the
market price of their stock often are subject to securities class action
litigation. If we were the subject of such litigation, it could result in
substantial costs and divert managements attention and resources.

Provisions of
Delaware law, our certificate of incorporation and bylaws could discourage,
delay or prevent a merger, acquisition or other change in control that
stockholders may consider favorable, including transactions in which you
might otherwise receive a premium for your shares. These provisions also could
limit the price that investors might be willing to pay in the future for shares
of our common stock, thereby depressing the market price of our common stock.
Furthermore, these provisions could prevent attempts by our stockholders to
replace or remove our management. These provisions:

·allow
the authorized number of directors to be changed only by resolution of our
board of directors;

·establish
a classified board of directors, providing that not all members of the board be
elected at one time;

·require
a 662¤3%
stockholder vote to remove a director, and only for cause;

·authorize
our board of directors to issue without stockholder approval blank check
preferred stock that, if issued, could operate as a poison pill to dilute the
stock ownership of a potential hostile acquirer to prevent an acquisition that
is not approved by our board of directors;

·require
that stockholder actions must be effected at a duly called stockholder meeting
and prohibit stockholder action by written consent;

·establish
advance notice requirements for stockholder nominations to our board of
directors or for stockholder proposals that can be acted on at stockholder
meetings;

·except
as provided by law, allow only our board of directors to call a special meeting
of the stockholders; and

·require
a 662¤3%
stockholder vote to amend our certificate of incorporation or bylaws.

In addition, because we
are incorporated in Delaware, we are governed by the provisions of Section 203
of the Delaware General Corporation Law, which may, unless certain criteria are
met, prohibit large stockholders, in particular those owning 15% or more of our
outstanding voting stock, from merging or combining with us for a prescribed
period of time.

The technologies used in
the cable and satellite television industry are rapidly evolving. Many
technologies and technological standards are in development and have the
potential to significantly transform the ways in which programming is
created and transmitted. We cannot accurately predict the effects that
implementing new technologies will have on our programming and broadcasting
operations. We may be required to incur substantial capital expenditures
to implement new technologies, or, if we fail to do so, may face
significant new challenges due to technological advances adopted by
competitors, which in turn could result in harming our business and operating
results.

The cable television industry is subject to extensive
legislation and regulation at the federal and local levels, and, in some
instances, at the state level, and many aspects of such regulation are
currently the subject of judicial proceedings and administrative or legislative
proposals. Similarly, the satellite television industry is subject to federal
regulation. Operating in a regulated industry increases our cost of doing
business as a video programmer.

The Cable Television Consumer Protection and
Competition Act of 1992, to which we refer as the 1992 Cable Act, includes
provisions that preclude cable operators affiliated with video programmers from
favoring their programmers over competitors. The 1992 Cable Act also
effectively precludes such programmers from selling their programming
exclusively to cable operators. These provisions potentially benefit
independent programmers such as us by limiting the ability of cable operators
affiliated with programmers from carrying only programming in which they have
an ownership interest and from offering exclusive programming arrangements.
However, the United States Court of Appeals for the District of Columbia
Circuit vacated the FCC rule limiting the carriage of affiliated
programmers by cable operators. Although the FCC issued further notices of
proposed rulemaking in 2001 and 2005 addressing this issue, it has not adopted
new rules. The exclusivity provision is scheduled to expire in October 2007,
but the FCC has initiated a rulemaking proceeding to determine if a further extension
is necessary to protect competition and diversity.

Regulatory carriage requirements also could reduce the
channel capacity available to carry The Outdoor Channel. The 1992 Cable Act
granted television broadcasters a choice of must-carry rights or retransmission
consent rights. The rules adopted by the FCC generally provide for
mandatory carriage by cable systems of all local full-power commercial
television broadcast signals selecting must-carry rights and, depending on a
cable systems channel capacity, non-commercial television broadcast signals.
Such statutorily mandated carriage of broadcast stations, coupled with the
provisions of the Cable Communications Policy Act of 1984, which require cable
television systems with 36 or more activated channels to reserve a percentage
of such channels for commercial use by unaffiliated third parties and permit
franchise authorities to require the cable operator to provide channel
capacity, equipment and facilities for public, educational and government access
channels, could reduce carriage of The Outdoor Channel by limiting its carriage
in cable systems with limited channel capacity. In 2001, the FCC adopted rules relating
to the cable carriage of digital television signals. Among other things, the rules clarify
that a digital-only television station can assert a right to analog or digital
carriage on a cable system. The FCC initiated a further proceeding to determine
whether television broadcasters may assert the rights to carriage of both
analog and digital signals during the transition to digital television and to
carriage of all digital signals. In 2005, the FCC decided that television
broadcasters do not have such additional must-carry rights. Broadcasters
formally have requested that the FCC reconsider this decision and are seeking
legislative change to require such carriage. In June 2006, this matter was
scheduled to be heard by the FCC at its open meeting, but was removed from the
agenda without discussion. The imposition of such

29

additional must-carry regulation,
in conjunction with any limited cable system channel capacity, would increase
the likelihood that cable operators may be forced to drop some cable
programming services and could reduce carriage of The Outdoor Channel.

The Telecommunications Act of 1996 required the FCC to
establish rules and an implementation schedule to ensure that video
programming is fully accessible to the hearing impaired through closed
captioning. The rules adopted by the FCC require substantial closed
captioning over a six to ten year phase-in period, which began in 2000, with
only limited exemptions. As a result, we will continue to incur additional
costs for closed captioning. Failure to meet these closed captioning
requirements could cause a service provider to discontinue carrying The Outdoor
Channel and result in regulatory action by the FCC.

If we distribute television programming through other
types of media, we may be required to obtain federal, state and local
licenses or other authorizations to offer such services. We may not be
able to obtain licenses or authorizations in a timely manner, or at all, or
conditions could be imposed upon licenses and authorizations that may not
be favorable to us. In the future, increased regulation of rates could, among
other things, put downward pressure on the rates charged by cable programming
services, and affect the ability or willingness of cable system operators to
retain or to add The Outdoor Channel network on their cable systems.

In addition, government-mandated a la carte carriage
or small tiers of channels by cable system operators could adversely impact our
viewership levels if The Outdoor Channel is sold a la carte or moved to such a
tier. In response to a request from the Committee on Energy and Commerce of the
House of Representatives, the FCCs Media Bureau conducted a study in 2004
regarding, among other things, government-mandated a la carte or mini-tier
packaging of programming services in which each subscriber would purchase only
those channels that he or she desired instead of the larger bundles of
different channels as is typical today. The Media Bureaus report in 2004
observed that such packaging would increase the cost of programming to
consumers and injure programmers. On February 9, 2006, the Media Bureau
released a further report which stated that the 2004 report was flawed and
which concluded that a-la-carte sales could be in the best interests of
consumers. Although the FCC cannot mandate a-al-carte sales, its endorsement of
the concept could encourage Congress to consider proposals to mandate
a-ala-carte sales or otherwise seek to impose greater regulatory controls on
how cable programming is sold. If, in response to any statue enacted by
Congress, or any rate or other government regulation, cable system operators
implement channel offerings that require subscribers to affirmatively choose to
pay a separate fee to receive The Outdoor Channel, either by itself or in
combination with a limited number of other channels, the number of viewers for
The Outdoor Channel could be reduced.

The regulation of
programming services, cable television systems and satellite licensees is
subject to the political process and has been in constant flux over the past
decade. Further material changes in the law and regulatory requirements are
difficult to anticipate and our business may be harmed by future
legislation, new regulation, deregulation or court decisions interpreting laws
and regulations.

Our recreational outdoor
activity entities, GPAA and Lost Dutchmans, share the general risks of all
outdoor recreational activities such as personal injury, environmental
compliance and real estate and environmental regulation. In addition to the
general cable television industry regulations, we are also subject to various
local, state and federal regulations, including, without limitation,
regulations promulgated by federal and state environmental, health and labor
agencies. Our prospecting clubs are subject to various local, state and federal
statutes, ordinances, rules and regulations concerning zoning, development
and other utilization of their properties. We cannot predict what impact
current or future regulations may have on these businesses. In addition,
failure to maintain required permits or licenses, or

30

to
comply with applicable regulations, could result in substantial fines or costs
or revocation of our operating licenses, which would have a material adverse
effect on our business and operating results.

A significant portion of
our assets consists of goodwill. In accordance with Statement of Financial
Accounting Standards No. 142, Goodwill and Other Intangible Assets, or
SFAS 142, we test goodwill for impairment during the fourth quarter of
each year, and on an interim date if factors or indicators become apparent that
would require an interim test. A significant downward revision in the present
value of estimated future cash flows for a reporting unit could result in an
impairment of goodwill under SFAS 142 and a non-cash charge would be
required. Such a charge could have a significant effect on our reported net
earnings.

We are authorized to issue
up to 25,000,000 shares of preferred stock. The issuance of any preferred stock
could adversely affect the rights of the holders of shares of our common stock,
and therefore reduce the value of such shares. No assurance can be given that
we will not issue shares of preferred stock in the future.

We do not anticipate
paying cash dividends on our common stock in the foreseeable future. Any
payment of cash dividends will also depend on our financial condition,
operating results, capital requirements and other factors and will be at the
discretion of our board of directors. Furthermore, at the time of any potential
payment of a cash dividend we may subject to contractual restrictions on, or
prohibitions against, the payment of dividends.

ITEM 1B.UNRESOLVED STAFF COMMENTS.

None.

ITEM 2.PROPERTIES.

We are currently
leasing approximately 32,000 square feet of commercial property located at
43445 Business Park Drive in Temecula, California. In addition, we own
approximately 36,000 square feet including 23,000 square feet of office space
and 13,000 square feet of warehouse space located at 43455 Business Park Drive
in Temecula. The property located at 43445 Business Park Drive is currently used
as our headquarters. The property located at 43455 Business Park Drive houses
our broadcast facility. Both of these properties are used in connection with
our two segments (The Outdoor Channel and Membership Division) and the
Corporate unit.

31

We also own the following properties that
we use for camping and gold prospecting in connection with our membership
division segment:

Designation of Property

Approximate Number of Acres

Location

Cripple River

2,300

Alaska

Loud Mine

37

Georgia

Stanton Property

60

Arizona

Burnt River

135

Oregon

Vein Mountain Camp

132

North Carolina

Junction Bar Place

28

California

Oconee Camp

120

South Carolina

Leadville Property

60

Colorado

Omilak Silver Mine

40

Alaska

Athens Property

70

Michigan

Blue Bucket

119

Oregon

In connection with
our Membership Division segment, we also have a mutual use agreement with a
non-profit organization, Lost Dutchmans Mining Association, Inc., that
owns additional properties, some adjacent to some of our properties. This
mutual use agreement allows our members to camp and prospect on the properties
owned by Lost Dutchmans Mining Association, Inc., and in return, the
members of Lost Dutchmans Mining Association, Inc. may camp and
prospect on our properties.

ITEM 3.LEGAL PROCEEDINGS.

From time to time, we may be involved in litigation relating
to claims arising out of our operations. As of the date of this report, we are
not a party to any legal proceedings that are expected, individually or in the
aggregate, to have a material adverse effect on our business, financial
condition or operating results.

We have never declared or paid
any cash dividends on our common stock, and we do not anticipate paying any
cash dividends in the foreseeable future. We currently anticipate that we will
retain all of our future earnings for use in the development and expansion of
our business and for general corporate purposes. Any determination to pay
dividends in the future will be at the discretion of our board of directors and
will depend upon our results of operation, financial condition and other
factors as the board of directors, in its discretion, deems relevant.

The graph below shows the five-year cumulative total
stockholder return assuming an investment of $100 and the reinvestment of
dividends, although dividends have not been declared on our common stock. The
graph compares total stockholder returns of our common stock, of the Russell
2000 Index and of a Peer Group Index consisting of Crown Media Holdings, Inc.
and ION Media Networks (formerly known as Paxson Communications Corporation).
The graph assumes that $100 was invested in our stock on December 31, 2001
and that the same amount was invested in the Russell 2000 Index and the Peer
Group Index. Historical results are not necessarily indicative of future
performance. Our common stock is currently traded on The Nasdaq Global Market
(formerly known as The Nasdaq National Market). Prior to September 15,
2004, our common stock was traded on NASDs OTC Bulletin Board.

The stockholder return
shown on the graph below is not necessarily indicative of future performance
and the Company will not make or endorse any predictions as to future
stockholder returns.

33

Outdoor Channel
Holdings, Inc.

Performance Graph

Comparison of
Cumulative Total Return*

*Assumes
$100 investment on December 31, 2001

ITEM 6.SELECTED FINANCIAL DATA.

You should read the selected consolidated financial
data presented below in conjunction with the audited consolidated financial
statements appearing elsewhere in this report and the notes to those statements
and Managements Discussion and Analysis of Financial Condition and Results of
Operations. The selected consolidated financial data as of December 31,
2006 and 2005, and for each of the years in the three-year period ended December 31,
2006 have been derived from our audited consolidated financial statements which
appear elsewhere in this report. The selected consolidated financial data as of
December 31, 2004, 2003 and 2002 and for each of the years in the two-year
period ended December 31, 2003 have been derived from our audited
consolidated financial statements which are not included in this report. The
historical results are not necessarily indicative of the operating results to
be expected in the future. All financial information presented has been
prepared in United States dollars and in accordance with accounting principles
generally accepted in the United States of America (U.S. GAAP).

34

In
2004, we completed the acquisition of all of the outstanding shares of The
Outdoor Channel, Inc. that we did not previously own. Please see Managements
Discussion and Analysis of Financial Condition and Results of OperationsAcquisition
of the Minority Interest of The Outdoor Channel, Inc. for a discussion
regarding this transaction and the comparability of the information before and
after such time.

Year Ended December 31,

2006

2005

2004

2003

2002

(In thousands, except per share amounts)

Income Statement Data:

Revenues:

Advertising

$

25,679

$

22,769

$

21,817

$

16,396

$

10,969

Subscriber fees

17,687

15,432

13,391

10,836

6,071

Membership income

5,156

4,707

4,746

4,456

4,353

Total revenues

48,522

42,908

39,954

31,688

21,393

Income (loss) from operations

(13,684

)

2,798

(39,704

)

7,627

4,576

Income (loss)
before income taxes and minority interest

(11,238

)

3,696

(39,589

)

7,653

4,621

Income tax
provision (benefit)

(3,913

)

1,503

(16,011

)

3,162

1,882

Income (loss)
before minority interest

(7,325

)

2,193

(23,578

)

4,491

2,739

Minority interest
in net income of consolidated subsidiary





682

897

444

Net income (loss)

(7,325

)

2,193

(24,260

)

3,594

2,295

Preferred stock
dividends









(90

)

Net income (loss)
applicable to common stock

$

(7,325

)

$

2,193

$

(24,260

)

$

3,594

$

2,205

Earnings (loss) per
common share:

Basic

$

(0.30

)

$

0.10

$

(1.52

)

$

0.26

$

0.17

Diluted

$

(0.30

)

$

0.09

$

(1.52

)

$

0.19

$

0.15

Weighted average number of
common shares outstanding:

Basic

24,556

21,423

15,998

13,824

13,220

Diluted

24,556

24,732

15,998

14,768

14,627

As of December 31,

2006

2005

2004

2003

2002

(In thousands)

Balance Sheet Data:

Cash and cash
equivalents

$

15,447

$

18,276

$

13,105

$

7,214

$

3,248

Investment in
available-for-sale securities

42,144

38,830

741

550

80

Goodwill

44,457

44,457

44,457





Total assets

147,957

151,822

99,569

19,848

11,830

Total liabilities

5,983

10,018

6,187

4,353

4,405

Minority interest
in subsidiary







2,302

1,263

Stockholders equity

$

141,974

$

141,804

$

93,382

$

13,193

$

6,162

35

ITEM 7.MANAGEMENTS DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

The information
contained in this report may include forward-looking statements. Our
actual results could differ materially from those discussed in any
forward-looking statements. The statements contained in this report that are
not historical are forward-looking statements within the meaning of Section 27A
of the Securities Act of 1933, as amended (the Securities Act), and Section 21E
of the Securities Exchange Act of 1934, as amended (the Exchange Act),
including statements, without limitation, regarding our expectations, beliefs,
intentions or strategies regarding the future. We intend that such
forward-looking statements be subject to the safe-harbor provisions contained
in those sections. Such forward-looking statements relate to, among other
things: (1) expected revenue and earnings growth and changes in mix; (2) anticipated
expenses including advertising, programming, personnel and others; (3) Nielsen
Media Research, which we refer to as Nielsen, estimates regarding total
households and cable and satellite homes subscribing to and viewers (ratings)
of The Outdoor Channel; and (4) other matters. We undertake no obligation
to publicly update or revise any forward-looking statements, whether as a
result of new information, future events or otherwise.

These statements involve significant risks and uncertainties and
are qualified by important factors that could cause our actual results to
differ materially from those reflected by the forward-looking statements. Such
factors include but are not limited to risks and uncertainties which are
discussed above under Item 1A Risk Factors and other risks and
uncertainties discussed elsewhere in this report. In assessing forward-looking
statements contained herein, readers are urged to read carefully all cautionary
statements contained in this Form 10-K and in our other filings with
the Securities and Exchange Commission. For these forward-looking statements,
we claim the protection of the safe harbor for forward-looking statements in Section 27A
of the Securities Act and Section 21E of the Exchange Act.

Through our
indirect wholly owned subsidiary, The Outdoor Channel, Inc. or TOC, we own
and operate The Outdoor Channel which is a national television network devoted
primarily to traditional outdoor activities, such as hunting, fishing and
shooting sports, as well as off-road motor sports and other outdoor related
lifestyle programming. We also own and operate related businesses which serve
the interests of The Outdoor Channels viewers and other outdoor enthusiasts.
These related businesses include: LDMA-AU, Inc., which we refer to as Lost
Dutchmans, and Gold Prospectors Association of America, LLC, which we refer
to as GPAA. Lost Dutchmans is a national gold prospecting campground club with
properties in Arizona, California, Colorado, Georgia, Michigan, North Carolina,
Oregon and South Carolina. Among other services offered, GPAA is the publisher
of the Gold Prospector & Treasure Hunters in the
Great Outdoors magazine. In addition, we are the owner of a
2,300 acre property near Nome, Alaska used to provide outings for a fee to
the members of Lost Dutchmans and GPAA. Outdoor Channel Holdings also wholly
owns 43455 BPD, LLC that owns the building housing our broadcast facility.

Our revenues include (1) advertising fees from advertisements
aired on The Outdoor Channel and from advertisements in Gold
Prospector & Treasure Hunters in the Great Outdoors
magazine; (2) subscriber fees paid by cable and satellite service
providers that air The Outdoor Channel; and (3) membership fees from
members in both Lost Dutchmans and GPAA and other income including magazine
sales, products and services related to gold prospecting, gold expositions,
expeditions and outings. Advertising fees include fees paid by third-party
programmers to purchase advertising time in connection with the airing of their
programs on The Outdoor Channel.

Certain amounts in the 2005 and 2004 consolidated financial
statements have been reclassified from amounts in the consolidated financial
statements we originally filed before the restatements described in Note 3 of
our financial statements either to conform to the 2006 presentations or to provide
additional detail about our operating results and more fully comply with the
Securities and Exchange Commissions (SEC) Regulation S-X. In particular certain
amounts included under expenses in the 2005 and 2004 consolidated financial
statements we originally issued have been reclassified in line items under
either cost of services or other expenses. Cost of services includes programming, satellite transmission
fees, production and operations and other direct costs. Other expenses include
advertising, selling, general and administrative and depreciation and
amortization. Further to better match intangible assets with the segment to
which they pertain, we have reclassified the amortizable intangible assets and
the goodwill which were recorded in connection with the acquisition on September 8,
2004 of the remaining 17.6% minority interest in TOC along with the related
amortization expense from Corporate to the TOC segment. Certain other
changes have been made in the historical consolidated financial statements to
conform with current presentations.

On September 8,
2004, we completed the acquisition of the remaining minority interest in TOC
which we did not previously own through (i) the merger of TOC with our
newly-formed, wholly owned subsidiary, with TOC being the surviving
corporation, and (ii) the exchange of each share of TOC common stock not
previously held by us or our subsidiaries for 0.65 shares of our common stock.
In addition, each outstanding option to purchase one share of TOC common stock
was exchanged for an option to purchase 0.65 shares of our common stock. In September 2004,
every two outstanding shares of our common stock were converted into five
outstanding shares of common stock in conjunction with our reincorporation from
Alaska to Delaware (the 5 for 2 split).

Based on the
exchange ratio in the merger we issued 3,069,790 shares of our common
stock as well as options to purchase 4,012,125 additional shares, each as
adjusted for the 5 for 2 split. The shares issued include the shares of common
stock issued to a former TOC shareholder who originally exercised his
dissenters rights in connection with the transaction, but who later withdrew,
with our consent, the demand to exercise such dissenters rights. For
accounting purposes, all previously outstanding TOC common shares, including
the dissenting shares, have been deemed to have been exchanged for shares of
our common stock in September 2004.

The acquisition of
the 17.6% minority interest in TOC was accounted for using the purchase method
of accounting. The cost of acquiring the minority interest included the
aggregate fair value of our common shares issued in exchange for common shares
of TOC and certain other direct costs. The acquisition cost was allocated based
on the fair value of the assets of TOC that were acquired and liabilities that
were assumed, including intangible assets that arose from contractual or other
legal rights or met certain other recognition criteria that underlie the
minority interest that was acquired. The excess of the cost of the minority
interest over the fair value of the underlying interest in the net identifiable
assets acquired was allocated to goodwill. In addition, in accordance with the
provisions of Statement of Financial Accounting Standards No. 109, Accounting
for Income Taxes (SFAS 109) the tax effects of the intangible assets
have been treated as additional consideration. This additional consideration
has also been allocated to goodwill.

The cost of our acquisition of the
minority interest in TOC was $54,985,000 based on the issuance at the closing
of 3,069,790 shares of our common stock (including shares issued to the former
dissenter) and the average closing price of $16.24 per share of our common
stock for a specified period before and after April 20, 2004, the last
trading day before the public announcement of the material terms of the
acquisition

37

plus the
assumption of 325,000 fully vested options of a former employee of TOC with an
intrinsic value of $4,250,000 plus certain other costs including income tax
effects. Based on the analysis of the fair value of the assets that were
acquired and liabilities that were assumed, the acquisition costs of
$54,985,000 were allocated primarily to intangible assets as follows:

Allocation

Estimated
Useful Life

(in thousands)

MSO relationships

$

10,573

21 years, 4 months

Advertising customer relationships:

Short form

1,351

4 years

Long form

621

3 years

Total
identifiable intangible assets

12,545

Goodwill

44,457

Indefinite

Deferred tax liability associated with intangible assets

(5,001

)

Minority interest in subsidiary

2,984

Aggregate purchase price

$

54,985

The exchange of
vested employee stock options by us for vested stock options held by employees
of TOC resulted in a charge to operations in our consolidated statement of
operations on September 8, 2004 equal to the value of the options issued
on that date net of any related income tax benefit. The options to purchase
approximately 3,687,125 shares that we issued in exchange for vested stock
options held by the employees of TOC on September 8, 2004 had a fair value
of $14.00 per share based on the closing price of our common stock on that day.
As a result, we incurred a non-cash, non-recurring charge to operating expenses
of $47,983,000 and recognized an income tax benefit of $19,098,000 or a net
charge of $28,885,000.

In some of the following period-to-period comparisons, we have
specifically noted, and at times excluded the non-cash, non-recurring
compensation expense of $47,983,000 incurred by us and the related tax benefit
of $19,098,000 as the result of the assumption of TOC options in connection
with our acquisition of the minority interest in TOC as part of our
analysis because we believe separately quantifying the effects of these items
provides the reader with a better understanding of our operating results. We
also believe that an analysis of our results in this manner, when presented in
conjunction with our analysis of the corresponding GAAP measures, provides
useful information to management and others in identifying and understanding
our operating performance for the periods presented and in making useful
comparisons.

During the three months ended September 30, 2006,
we reviewed the facts and circumstances regarding the useful life of our
intangible assets attributable to multi-system cable operator (MSO)
relationships as of September 8, 2004 when we completed the acquisition of
the minority interest in TOC that we did not previously own and allocated a
portion of the excess of the cost of the minority interest over the fair value
of the underlying interest in the net identifiable assets acquired to the MSO
relationships. After consideration of the facts and circumstances, the nature
of our business, our experience with the MSOs of our network, and the
proclivities of our industry, we have concluded that as of September 8,
2004 our MSO relationships asset had a definite life which we have estimated to
be 21 years and 4 months and, accordingly, we reclassified all of the amounts
originally allocated to the cost of

38

MSO relationships from
other non-amortizable intangible assets to amortizable intangible assets as of
that date.

The accounting treatment
resulting from this reassessment of the useful life of this asset has resulted
in adjustments to amortization expense and certain other related adjustments to
our previously issued consolidated financial statements as of and for the
periods ended September 30, 2004 through June 30, 2006. We determined
that the effects of these adjustments were immaterial individually and in the
aggregate to our annual and quarterly reports filed prior to January 1,
2005 and thus we did not amend those filings. However, we determined the
effects of these adjustments were material to our quarterly and annual reports
filed for the periods ended March 31, 2005 through June 30, 2006 and
we have amended all of those filings. The comparative consolidated financial
statements in this report reflect the restated balances.

During the three months ended September 30, 2006,
we engaged third party consultants to review our business practices and
strategy. Among the areas reviewed was our approach to growing our subscriber
base through our relationships with MSOs. In September 2006, the
consultants concluded, and the Board of Directors accepted their conclusions,
that a complete revision of the terms of our relationships with MSOs was
necessary to meet the subscriber growth goals established by us. Upon
acceptance of that conclusion and the general strategy outlined by the
consultants, we reviewed our amortizable MSO relationships and our other
amortizable intangible assets (customer lists and trademarks) for impairment in
accordance with Statement of Financial Accounting Standards No. 144, Accounting
for Impairment or Disposal of Long-Lived Assets (SFAS 144). Based upon
the changed circumstances, we concluded that, as of the date we accepted the
consultants conclusion, our MSO relationships asset was fully impaired and
that our other remaining amortizable intangible assets were not. Accordingly,
we have charged to expense the remaining unamortized carrying value of the MSO
relationships of $9,540 during the year ended December 31, 2006.

We further concluded that
the carrying value of goodwill has not been impaired and that the changed
circumstances have not affected the estimated lives of the remaining
amortizable intangible assets. However, these estimates will continue to be
reviewed during each reporting period to determine whether circumstances
continue to support their carrying values and, where applicable, their
estimated useful lives. Estimates are subject to risks and uncertainties, which
could cause actual results to differ materially from those projected or implied
in the determination of the fair value. A significant downward revision in the
present value of estimated future cash flows for a reporting unit or the
undiscounted cash flows from the other remaining amortizable intangible assets
could result in an impairment of goodwill or the remaining amortizable
intangibles and a non-cash charge would be required. Such a charge could have a
significant effect on our reported net earnings.

The preparation of financial statements in conformity with United
States generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
We believe the following critical accounting policies affect our more
significant judgments and estimates used in the preparation of financial statements.

Advertising
revenues for The Outdoor Channel are recognized when the advertisement is
aired. Advertising revenues from advertisements in our bi-monthly magazine are
recognized when the magazine is distributed. Revenues from the expeditions are
recognized when they are taken in June through August each year.
Revenues from outings and gold expositions are recognized at the time of the
event. Subscriber fees for The Outdoor Channel are recognized in the period the
programming is aired by the distributor and collection is probable.

Broadcast and
national television network advertising contracts may guarantee the
advertiser a minimum audience for its advertisements over the term of the
contracts. We provide the advertiser with additional advertising time if we do
not deliver the guaranteed audience size. The amount of additional advertising
time is generally based upon the percentage of shortfall in audience size. This
requires us to make estimates of the audience size that will be delivered
throughout the terms of the contracts. We base our estimate of audience size on
information provided by ratings services and our historical experience. If we
determine we will not deliver the guaranteed audience, an accrual for make-good
advertisements is recorded as a reduction of revenue. The estimated make-good
accrual is adjusted throughout the terms of the advertising contracts.

We recognize merchandise sales when the product is shipped and
collection of the receivable is probable. Lost Dutchmans campground membership
sales are generally recognized on a straight-line basis over the estimated
average life (7 years) of the membership. We do not record receivables
arising under these contracts. Accordingly, revenues recognized do not exceed the
total cash payments received and cash received in excess of revenue earned is
recorded as deferred revenue. The majority of GPAA membership sales is for one
year and is generally recognized in the year of sale. Multi-year GPAA
membership sales are recognized on a straight-line basis over the life of a
membership, and an estimated life of 15 years for a lifetime membership.

Long-lived assets, such as property and equipment, MSO
relationships, advertising customer relationships, goodwill and trademarks, are
reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. Impairment
losses are recognized when events or changes in circumstances indicate that the
undiscounted cash flows estimated to be generated by such assets are less than
their carrying value and, accordingly, all or a portion of such carrying value
may not be recoverable. Impairment losses for assets to be held and used
are then measured based on the excess, if any, of the carrying amounts of the
assets over their estimated fair values. Long-lived assets to be disposed of in
a manner that meets specific criteria are stated at the lower of their carrying
amounts or fair values less costs to sell and are no longer depreciated.

We maintain an allowance for doubtful accounts for estimated
losses that may arise if any of our customers are unable to make required
payments. Management specifically analyzes the age of customer balances,
historical bad debt experience, customer credit-worthiness and trade
publications regarding the financial health of our larger customers and changes
in customer payment terms when making estimates of the uncollectability of our
trade accounts receivable balances. If we determine that the financial
condition of any of our customers deteriorated, whether due to customer
specific or general economic issues, increases in the allowance may be
made.

We account for
income taxes pursuant to the asset and liability method which requires deferred
income tax assets and liabilities to be computed for temporary differences
between the financial statement and tax bases of assets and liabilities that
will result in taxable or deductible amounts in the future based on enacted
laws and rates applicable to the periods in which the temporary differences are
expected to affect taxable income. Valuation allowances are established when
necessary to reduce deferred tax assets to the amounts expected to be realized.
The income tax provision is the tax payable or refundable for the period plus
or minus the change during the period in deferred tax assets and liabilities.

With our adoption of
SFAS 123R on January 1, 2006 we present, on a prospective basis, the
tax benefits from exercise of stock options in excess of recognized expense as
a cash flow from financing activities in the accompanying consolidated
statement of cash flows rather than as a cash flow from operating activities,
as was prescribed under accounting rules applicable through December 31,
2005. This requirement reduces the amount reflected as net cash provided by
operating activities and increases net cash provided by financing activities.
Total cash flows remained unchanged from that which would have been reported
under prior accounting rules. We recognize such benefits only if they have been
realized which we determine by following the tax law method, which provides
that current deductions are recognized before realizing the benefits of our net
operating loss carryforwards.

In December 2004,
the Financial Accounting Standards Board (FASB) issued Statement of Financial
Accounting Standards No. 123 (revised 2004) (SFAS 123R) Share-Based
Payment which revised the standards for the accounting for transactions in
which an entity exchanges its equity instruments for goods or services and
focuses primarily on accounting for transactions in which an entity obtains
employee services in share-based payment transactions. SFAS 123R requires
that the fair value of such equity instruments, including all options granted
to employees, be recognized as expense in the historical financial statements
as services are performed. Prior to the adoption of SFAS 123R, we used the
intrinsic value method to account for employee stock options and, generally,
made no charges against earnings with respect to those options at the date of
grant since our employee options had exercise prices that were equal to the
market price. SFAS 123R is effective for issuers as of the beginning of
the first annual reporting period that begins after December 15, 2005.
Accordingly, we adopted the provisions of SFAS No. 123R effective January 1,
2006.

In June 2006,
the FASB issued Interpretation No. 48, Accounting for Uncertainty in
Income Taxesan interpretation of FAS No. 109 (FIN 48), which
clarifies the accounting for uncertainty in income taxes. Currently, the
accounting for uncertainty in income taxes is subject to significant and varied
interpretations that have resulted in diverse and inconsistent accounting
practices and measurements. Addressing such diversity, FIN 48 prescribes a
consistent recognition threshold and measurement attribute, as well as clear
criteria for subsequently recognizing, derecognizing and measuring changes in
such tax positions for financial statement purposes. FIN 48 also requires
expanded disclosure with respect to the uncertainty in income taxes. FIN 48 is
effective for fiscal years beginning after December 15, 2006. We have not
yet determined the impact of FIN 48 on our consolidated financial position,
results of operations, cash flows or financial statement disclosures.

In September 2006,
the Securities and Exchange Commission issued Staff Accounting Bulletin No. 108,
Considering the Effects of Prior Year Misstatements when Quantifying
Misstatements in Current Year Financial Statements(SAB
108). SAB 108 provides guidance on how prior year misstatements should be
taken into consideration when quantifying misstatements in current year
financial statements for purposes of determining whether the current years
financial statements are materially

41

misstated. SAB 108 is effective for fiscal years ending on or
after November 15, 2006. The adoption of SAB 108 did not have any impact
on the Companys results of operations or financial condition.

In September 2006,
the FASB issued SFAS No. 157 (SFAS No. 157), Fair Value
Measurements. This statement establishes a
consistent framework for measuring fair value and expands disclosures on fair
value measurements. SFAS No. 157 is effective for fiscal years
beginning after November 15, 2007. We have not determined the impact, if
any, the adoption of this statement will have on our consolidated financial
statements.

In February 2007,
the FASB issued SFAS No. 159, The Fair Value Option for Financial
Assets and Financial Liabilities (SFAS No. 159). SFAS No. 159
permits entities to choose to measure many financial assets and financial
liabilities at fair value. Unrealized gains and losses on items for which the
fair value option has been elected will be reported in earnings. SFAS No. 159
is effective for fiscal years beginning after November 15, 2007. We have
not determined the impact, if any, the adoption of this statement will have on
our consolidated financial statements.

The FASB had
issued certain other accounting pronouncements as of December 31, 2006
that will become effective in subsequent periods; however, our management does
not believe that any of those pronouncements would have significantly affected
our financial accounting measurements or disclosures had they been in effect
during 2006, 2005 or 2004.

42

Comparison of Operating Results for the Years Ended December 31,
2006 and December 31, 2005

The following table discloses certain
financial information for the periods presented, expressed in terms of dollars,
dollar change, percentage change and as a percent of total revenue (all dollar
amounts are in thousands):

Our revenues
include revenues from (1) advertising fees; (2) subscriber fees; and (3) membership
income. Advertising revenue is generated from the sale of advertising time on
The Outdoor Channel including advertisements shown during a program (also known
as short-form advertising) and infomercials in which the advertisement is
the program itself (also known as long-form advertising) and from the sale
of advertising space in publications such as the Gold
Prospectors & Treasure Hunters in the Great Outdoors
magazine. Advertising revenue is also generated from fees paid by third party
programmers that purchase advertising time in connection with the airing of
their programs on The Outdoor Channel. In each of the years ended December 31,
2006 and 2005, The Outdoor Channel generated approximately 97.0% of our
advertising revenue. Subscriber fees are solely related to The Outdoor Channel.
Membership income is generated by our activities other than the operation of
The Outdoor Channel and includes membership sales, magazine sales, merchandise
sales, and sponsored outings and expeditions in connection with GPAA and Lost
Dutchmans.

43

Total revenues for
the year ended December 31, 2006 were $48,522,000, an increase of
$5,614,000, or 13.1%, compared to revenues of $42,908,000 for the year ended December 31,
2005. The net increases were the result of changes in several items comprising
revenue as discussed below.

Advertising revenue for the year ended December 31,
2006 was $25,679,000, an increase of $2,910,000 or 12.8% compared to
$22,769,000 for the year ended December 31, 2005. For December 2006,
Nielsen estimated that The Outdoor Channel had 29.7 million subscribers
compared to 25.7 million for the same period a year ago. The increase in
advertising revenue for the year ended December 31, 2006 principally
reflects higher prices paid by third party programmers for advertising time in
connection with the airing of their programs, incremental advertising inventory
retained by us to sell and additional revenue generated by our technical
services department for providing production services for third party
programmers. These factors contributing to the increase were offset somewhat by
less demand for our long-form inventory that resulted in lower prices paid for
infomercial blocks. We expect softness in the long-form market to continue for
the short-term future. We expect to provide less technical services to third
parties in 2007 than in 2006.

Nielsen revises its estimate of the number of
subscribers to our channel each month, and for March 2007 Nielsen
increased its estimate to almost 30 million subscribers. Nielsen is the leading
provider of television audience measurement and advertising information
services worldwide, and its estimates and methodology are generally accepted
and used in the advertising industry. Although we realize Nielsens estimate is
typically greater than the number of subscribers on which a network is paid by
the service providers, we are currently experiencing a greater difference in
these two different numbers of subscribers than we would expect. We anticipate
this difference to decrease as we grow our total subscriber base. There can be
no assurances that Nielsen will continue to report growth of its estimate of our
subscribers and in fact at some point Nielsen might even report declines in our
subscriber estimate. If that were to happen, we could suffer a reduction in
advertising revenue.

Subscriber fees for the year ended December 31,
2006 were $17,687,000, an increase of $2,255,000 or 14.6% compared to
$15,432,000 for the year ended December 31, 2005. The increase in
subscriber fees for the period was primarily due to an increased number of
paying subscribers both from new affiliates and from existing distributors as
well as contractual subscriber fee rate increases with existing service
providers carrying The Outdoor Channel.

We plan to accelerate our subscriber growth utilizing
various means including deployment of rate relief for new and existing
subscribers and payment of subscriber acquisition or launch support fees among
other tactics. Such launch support fees are capitalized and amortized over the
period that the pay television distributor is required to carry the newly
acquired TOC subscriber. To the extent revenue is associated with the
incremental subscribers, the amortization is charged to offset the related
revenue. Any excess of launch support amortization over the related subscriber
fee revenue is charged to expense. As a result of a combination of these
tactics, we anticipate subscriber fee revenue, net will decrease over the
short-term future as we deploy this strategy.

Membership income for the
year ended December 31, 2006 was $5,156,000, an increase of $449,000 or
9.5% compared to $4,707,000 for the year ended December 31, 2005. We
believe that the recent surge in gold prices has reflected itself in renewed
interest by the consuming public that led to our increased activity in 2006. In
the near term, we do not expect significant fluctuations in membership income
year-to-year.

Our cost of services consists primarily of the cost of
providing our broadcast signal and programming to the distributors for
transmission to the consumer and costs associated with the production and
delivery of our magazine and merchandise sales. Cost of services includes (1) programming
costs; (2) satellite transmission fees; (3) production and operations
costs; and (4) other direct costs. Total cost of services for

44

the year ended December 31,
2006 was $16,134,000, an increase of $3,220,000 or 24.9%, compared to
$12,914,000 for the year ended December 31, 2005. As a percentage of
revenues, total cost of services was 33.2% and 30.1% in the years ended December 31,
2006 and 2005, respectively. The increase in cost of services, as further
discussed below, relates principally to increased programming costs related to
producing shows to air on our second network, which we did not have in the
first half of 2005. We expect cost of services to continue to increase in the future
as we expand our existing markets and in-house production to support our
advertising strategy.

Programming expenses for the year ended December 31,
2006 were $8,355,000, an increase of $2,751,000 or 49.1% compared to $5,604,000
for year ended December 31, 2005. The increase is principally a result of
our decision to launch our second channel, Outdoor Channel 2 HD, on July 1,
2005. We incurred minimal programming costs relative to this channel in the
first and second quarters of 2005 as most of such costs incurred at that time
were charged to prepaid programming costs in anticipation of its launch in the
second half of 2005.

Our policy is to charge costs of specific show
production to programming expense over the expected airing period beginning
when the program first airs. The cost of programming is generally first
recorded as prepaid programming costs and is then charged to programming
expense based on the anticipated airing schedule. The anticipated airing
schedule has typically been over 2 or 4 quarters that generally does not extend
over more than 2 years. As the anticipated airing schedule changes, the timing
and amount of the charge to expense is prospectively adjusted accordingly. At
the time we determine a program is unlikely to air or re-air, we charge
programming expense with the remaining associated cost recorded in prepaid
programming. We reassessed our programming direction during the fourth quarter
of 2006 and charged to expense over $900,000 of prepaid programming costs that
had otherwise been planned to air and then be expensed in the future.
Programming expenses are expected to stabilize as a percentage of revenue over
the near term. Further, we are considering a new programming strategy which
will include more airings per show including a greater number of repeat
episodes within the quarter and potentially more quarters extending over more
years. As this plan is developed we will reconsider the appropriate timing of
the charge to expense of our programming costs.

Satellite transmission fees for the year ended December 31,
2006 were $2,550,000, an increase of $53,000, or 2.1%, compared to $2,497,000
for the year ended December 31, 2005. We do not expect significant
fluctuations in satellite transmission fees other than marginal increases reflecting
contractual price increases over the foreseeable future.

Production and operations costs for the year ended December 31,
2006 were $4,078,000, an increase of $620,000, or 17.9%, compared to $3,458,000
for the year ended December 31, 2005. The increase in costs principally
relates to increased personnel to support our growing infrastructure as we
produce more shows in-house and to support our new broadcast facility.

Other direct costs for the
year ended December 31, 2006 were $1,151,000, a decrease of $204,000, or
15.1%, compared to $1,355,000 for the year ended December 31, 2005. The
decrease is principally related to less printed material being sent to the
members of our Membership Division including one less magazine in 2006 than in
2005, and other related materials.

Other expenses consist of the cost of (1) advertising;
(2) selling, general and administrative expenses; and (3) depreciation
and amortization. In addition for the year ended December 31, 2006, other
expenses include impairment of intangible assets. For the year ended December 31,
2004, other expenses included non-cash compensation expense from exchange of
stock options.

45

Total other expenses for the year ended December 31,
2006 were $46,072,000, an increase of $18,876,000 or 69.4%, compared to
$27,196,000 for the year ended December 31, 2005. As a percentage of
revenues, total other expenses were 95.0% and 63.4% for the years ended December 31,
2006 and 2005, respectively. The increase in other expenses was due to several factors
including the write-off of $9,540,000 of the carrying value of MSO
relationships as a result of a changed distribution strategy adopted by the
Board in September 2006, adoption of SFAS 123R effective January 1,
2006 resulting in additional compensation expense of $3,496,000, in addition
$2,496,000 from the recognized expense related to performance units granted to
our new CEO in the fourth quarter of 2006, additional depreciation expense
resulting from our broadcast facility which was placed into service effective April 1,
2006, and other items more fully described as follows.

Advertising expenses for the year ended December 31,
2006 were $7,119,000 an increase of $19,000 or 0.3% compared to $7,100,000 for
the year ended December 31, 2005. We had planned increased advertising
expenditures but delayed such in anticipation of launching a cross channel
television advertising campaign, which began in late September of 2006. We
believe that our advertising expenses will substantially increase over the short-term
future as we continue to deploy tactics to increase our subscriber base and the
number of viewers watching our programming. We are reassessing our
branding strategy and have decided to adopt a new logo.

Selling, general and administrative expenses for the
year ended December 31, 2006 were $26,168,000, an increase of $8,793,000
or 50.6% compared to $17,375,000 for the year ended December 31, 2005. As
a percentage of revenues, selling, general and administrative expenses were
53.9% and 40.5% in the years ended December 31, 2006 and 2005,
respectively. The increase was primarily attributable to the adoption of
SFAS 123R as of January 1, 2006, which now requires us to charge the
fair value of stock options we have issued to our employees over the vesting period
to compensation expense that we did not have to record in 2005. The non-cash
charge in the year ended December 31, 2006 amounted to $3,496,000.
Additionally, we granted our new CEO two traunches of performance units of
400,000 shares each which vest in 50,000 share increments based upon our stock
price reaching stipulated levels. We have calculated their fair value using a
lattice model. The first traunch has an estimated value of $4,634,000 and has
an expected service period of 0.6 years. In 2006, we recognized $1,655,000
related to this grant. The second grant of 400,000 performance units which also
vest in 50,000 share increments based upon our stock price reaching stipulated
levels was calculated to have a fair value of $4,474,000 and an expected service
period of 1.1 years. In 2006 we recognized $841,000 of compensation expense
related to this grant. We incurred $377,000 of severance and related fees
related to TOCs former CEO. The remainder of the increase in selling, general
and administrative fees related primarily to increased research fees to support
our selling efforts, consulting fees pertaining to assistance in the
development of our strategic plan, accounting fees for the audit of our
evaluation of the effectiveness of our internal control over financial
reporting in 2006 related to the 2005 fiscal year, legal fees incurred in the
first quarter as a result of our ongoing efforts related to our carriage
agreement negotiations and to other operating costs.

We anticipate that selling, general and administrative
costs will continue to increase over the foreseeable future. Such increases are
expected to result from the amortization of subscriber acquisition fees, also
referred to as launch support fees, in excess of the related subscriber revenue
as well as other marketing, advertising and promotion expenses as we continue
to work to gain increased distribution of our channel, as well as from
increases in other corporate expenses. We anticipate we will incur compensation
costs in the amount of $6,612,000 in the year ending December 31, 2007
related to the performance units granted to our new CEO.

Impairment of intangible assets for the year ended December 31,
2006 carried a charge of $9,540,000 as a result of our quarterly impairment
review of amortizable intangible assets and goodwill. During the year ended December 31,
2006, we engaged third party consultants to review our business practices and
strategy. Among the areas reviewed was our approach to grow our subscriber base
through our

46

relationships with our
MSOs. Prior to this time our strategy was to focus on incremental growth
opportunities without impacting our existing subscriber base. Our consultants
completed a market survey and other steps they deemed appropriate. In September 2006,
the consultants concluded, and the Board of Directors accepted their
conclusions, that a complete revision of the terms of the relationships was
necessary to meet the subscriber growth goals established by us.

Upon acceptance of that conclusion and general strategy
outlined by the consultants, we reviewed our amortizable intangible assets for
impairment. Among the components of the plan was subscriber rate relief in some
form for both existing subscriber relationships and the incremental (if any)
subscribers that might be added to our subscriber base as a result of the
planned actions. Acknowledging the changed circumstances, we assessed the fair
value of our amortizable intangible assets and concluded that our MSO
relationships asset had become fully impaired. Accordingly we have charged to
expense, the carrying value of $9,540,000 during the year ended December 31,
2006.

We further concluded that the carrying values of our
other intangible assets have not been impaired nor do we believe that the
changed circumstances have affected the estimated lives of the amortizable
intangible assets. However, these estimates will continue to be reviewed during
each reporting period to determine whether circumstances continue to support
their estimated useful lives and fair value. Estimates are subject to risks and
uncertainties, which could cause actual results to differ materially from those
projected or implied in the determination of the fair value. A significant
downward revision in the present value of estimated future cash flows for a
reporting unit could result in an impairment of goodwill or the amortizable
intangibles and a non-cash charge would be required. Such a charge could have a
significant effect on our reported net earnings.

Depreciation and
amortization for the year ended December 31, 2006 were $3,245,000, an
increase of $524,000 or 19.3% compared to $2,721,000 for the year ended December 31,
2005. The increase in depreciation primarily relates to our broadcast facility
which was placed into service April 1, 2006.

Income (loss) from
operations for the year ended December 31, 2006 was a loss of $13,684,000,
a decrease of $16,482,000 compared to income of $2,798,000 for the year ended December 31,
2005. As discussed above, the losses in the year ended December 31, 2006
were driven by the impairment of amortizable intangible assets resulting in a
charge of $9,540,000 during the period. This loss was partially offset by
growth of our revenue. The decrease experienced over the year ended December 31,
2006 was compounded by increased programming costs associated with the launch
of our second channel, Outdoor Channel 2 HD, in the second half of 2005, the
expensing of programming costs related to programs we no longer anticipate
airing, increased compensation expense resulting from the adoption of
SFAS 123R and the transition of our senior management team, increased
legal fees relating to our carriage agreements and depreciation related to our
newly opened broadcast facility. As we continue to strive to grow our
subscriber base which involves increased advertising expenditures, possible
subscriber rate relief to our carriage partners and the ongoing and planned
payment of launch support, we will continue to incur increased expenses such as
programming, marketing and advertising that are unlikely to be immediately
offset by revenues. As a result, we anticipate our operating margins will be
negatively impacted over the short-term future until scale is achieved to
reverse the trend. There can be no assurance that these strategies will be
successful.

Interest expense for the
year ended December 31, 2006 was $246,000, an increase of $201,000
compared to $45,000 for the year ended December 31, 2005. This is
attributable to having obtained two term loans in November 2005 with an
original aggregate principal amount of $4,950,000 with effective fixed

47

interest
rates of 6.59% and 6.35%. We repaid these loans in October 2006 and do not
expect to incur interest expense in the foreseeable future.

Other income for the year
ended December 31, 2006 was $2,692,000, an increase of $1,749,000 compared
to $943,000 for the year ended December 31, 2005. This improvement was
primarily due to increased dividends and interest earned on our increased
average balances of our investment in available-for-sale securities and cash
and cash equivalents.

Income (loss) before income taxes as a percentage of
revenues was (23.2)% for the year ended December 31, 2006 compared to 8.6%
for year ended December 31, 2005.

The TOC segments loss before income taxes was
$(9,240,000) for the year ended December 31, 2006, a decrease of $14,105,000
from income of $4,865,000 for the year ended December 31, 2005.

TOCs loss before income taxes for the year ended December 31,
2006 was significantly impacted by the $9,540,000 write-off of our MSO
relationship amortizable intangible asset and the additional compensation
charges associated with the transition of our senior management including
severance and related charges of $377,000 and performance unit expense of
$2,496,000. Additional increased compensation expense resulted from of the
adoption of SFAS 123R of $1,403,000. Further, we placed our new broadcast
facility into service April 1, 2006, which resulted in depreciation
expense of approximately $600,000.

Additionally, programming costs increased as a result
of having launched our second channel, Outdoor Channel 2 HD, at the beginning
of the third quarter of 2005 and the planned non-airing of certain programs
resulting in a write-off of their capitalized costs. Also, we incurred
incremental expenses in subscriptions and research to support our programming
and selling efforts. Offsetting the increased expenses were increases in subscriber
fee revenue from deeper penetration of our network with some of our carriers,
increased prices charged for the service, increased advertising revenues as a
result of increased prices charged to our third party producers and to
short-form advertisers principally related to the increasing Nielsen universe
estimate.

The Membership Division segments income before income
taxes increased to $327,000 for the year ended December 31, 2006 compared
to $280,000 for the year ended December 31, 2005. Expressed as a
percentage of revenues, the Membership Division segments income before income
taxes improved to 5.5% for the year ended December 31, 2006 compared to
5.2% for the year ended December 31, 2005. Revenue increased $562,000 or
10.4% in the year ended December 31, 2006. The improvement is principally
a result of a renewed interest in gold prospecting, which we believe is
partially driven by rising gold prices. Contributing to the improving segment
margin was a slight decrease in personnel with the commensurate savings of
payroll, payroll related expenses and travel costs. The decline in margin in
the year ended December 31, 2006 is increased compensation incurred as a
result of the adoption of SFAS 123R on January 1, 2006 resulting in
stock compensation expense of $113,000 not incurred in the same period of 2005.

Corporate incurred a loss
before income taxes for the year ended December 31, 2006 amounting to
$2,325,000, an increased loss of $876,000 compared to a loss of $1,449,000 for
the year ended December 31, 2005. The expenses allocated to Corporate
include: professional fees such as public relations, accounting and legal fees,
amortization of intangibles, business insurance, board of directors fees and
expenses, and an allocation of corporate officers payroll and related
expenses. Effective January 1, 2006, we prospectively adopted
SFAS 123R and Corporate incurred a charge to compensation expense

48

related
to stock options of $1,980,000 in the year ended December 31, 2006.
Corporate also was allocated additional payroll costs reflecting the increased
time spent by executive officers on corporate matters instead of operating
matters. Offsetting these increased costs was interest and dividend income
earned on our cash and investment in available-for-sale securities and lower
accounting fees compared to a year ago due to less impact from the
implementation of Sarbanes-Oxley procedures.

Income tax benefit for the
year ended December 31, 2006 was $3,913,000, a change of $5,416,000 as
compared to an income tax provision of $1,503,000 for the year ended December 31,
2005. The change was principally due to our incurring a loss in the year ended December 31,
2006 as compared to income generated in the year ended December 31, 2005
and the application of SFAS 123R as it relates to the expensing of and
concomitant income tax effect of accounting for share-based compensation. The
effective income tax provision (benefit) was approximately (34.8%) and 40.7%,
for the years ended December 31, 2006 and 2005, respectively.

Net income (loss) for the year ended December 31,
2006 was a net loss of $7,325,000, a decrease of $9,518,000 compared to a net
income of $2,193,000 for the year ended December 31, 2005. The decreases
were due to the reasons stated above.

49

Comparison of Operating Results for the Years Ended December 31,
2005 and December 31, 2004

The following table discloses certain
financial information for the periods presented, expressed in terms of dollars,
dollar change, percentage change and as a percent of total revenue (all dollar
amounts are in thousands):

For the years ended
December 31, 2005 and 2004, The Outdoor Channel generated approximately
97.0% and 97.2% of our advertising revenue, respectively. Subscriber fees are
solely related to The Outdoor Channel. Membership income is generated by our
activities other than the operation of The Outdoor Channel and includes
membership sales, magazine sales, merchandise sales, and sponsored outings and
expeditions in connection with GPAA and Lost Dutchmans.

Total revenues for
the year ended December 31, 2005 were $42,908,000, an increase of
$2,954,000, or 7.4%, compared to revenues of $39,954,000 for the year ended December 31,
2004. The net increases were the result of changes in several items comprising
revenue as discussed below.

50

Advertising
revenue for the year ended December 31, 2005 was $22,769,000, an increase
of $952,000 or 4.4% compared to $21,817,000 for the year ended December 31,
2004. For December 2005, Nielsen estimated that The Outdoor Channel had
25.7 million viewers compare to 24.8 million for the same period a year ago.
(Nielsen revises this estimate each month and for March 2006, Nielsen
increased its estimate to approximately 26.2 million subscribers). The increase
in advertising revenue for the year ended December 31, 2005 reflects a
larger percentage of our short-form advertising inventory being sold to
national and endemic advertisers, generally at higher rates, than inventory
being sold to direct response advertisers or long-form (infomercial)
advertisers.

Subscriber fees
for the year ended December 31, 2005 were $15,432,000, an increase of
$2,041,000 or 15.2% compared to $13,391,000 for the year ended December 31,
2004. The increase in subscriber fees for the period was primarily due to an
increased number of paying subscribers both from new affiliates and from
existing distributors and contractual subscriber fee rate increases with
existing service providers carrying The Outdoor Channel.

Membership income for the year ended December 31, 2005 was
$4,707,000, a decrease of $39,000 or 0.8% compared to $4,746,000 for the year
ended December 31, 2004. We do not consider this decline to be
significant; rather the relatively static balance reflects our belief that this
revenue source has reached relative maturity. We do not expect significant
change in the balance from year-to-year in the near term.

Total cost of services for the year ended December 31,
2005 was $12,914,000, an increase of $4,412,000 or 51.9%, compared to
$8,502,000 for the year ended December 31, 2004. As a percentage of
revenues, total cost of services was 30.1% and 21.3% in the years ended December 31,
2005 and 2004, respectively. We expect cost of services to continue to increase
in the future as we expand our existing markets and in-house production to
support our advertising strategy.

Programming
expenses for the year ended December 31, 2005 were $5,604,000, an increase
of $3,083,000 or 122.3% compared to $2,521,000 for the year ended December 31,
2004. The increase is principally a result of our decision to launch our second
channel, Outdoor Channel 2 HD, on July 1, 2005. In 2005, this channel was
programmed with native high definition shows produced almost entirely in-house
as opposed to the preponderance of third party production on our standard
definition channel. We produced in excess of 40 shows plus numerous specials
in-house that aired in the third and fourth quarters of 2005. In some
situations, shows that ran in 2005 on only one of our channels are planned to
be aired again in 2006, but on our other channel. We aired 16 shows that were
internally produced during the third and fourth quarters of 2004.

Satellite
transmission fees for the year ended December 31, 2005 were $2,497,000, an
increase of $146,000, or 6.2%, compared to $2,351,000 for the year ended December 31,
2004. This increase reflects an additional charge for the back-up satellite
capability negotiated with our satellite provider during the fourth quarter of
2004 and a scheduled price increase of $5,000 per month in October 2005.

Production and operations costs for the year ended December 31, 2005 were
$3,458,000, an increase of $929,000, or 36.7%, compared to $2,529,000 for the
year ended December 31,
2004. The increase in costs principally relates to increased infrastructure
including personnel, small equipment purchases and other items as we produce
more shows in-house and support our new broadcast facility.

Other direct costs for the
year ended December 31,
2005 were $1,355,000, an increase of $254,000, or 23.1%, compared to $1,101,000
for the year ended December 31,
2004. The increase in other direct costs principally relates to increased
Alaska trip expenses with greater number of participants and increased costs in
publishing our magazine.

Total other
expenses for the year ended December 31, 2005 were $27,196,000, a decrease
of $43,960,000 or 61.8%, compared to $71,156,000 for the year ended December 31,
2004. As a percentage of revenues, total other expenses were 63.4% and 178.1%
in the years ended December 31, 2005 and 2004, respectively. The decrease
in other expenses was due to the non-recurring charge to compensation expense
incurred in September 2004 as a result of the issuance of options to TOC
employees with an intrinsic value of $47,983,000 in accordance with the terms
of the acquisition by the Company of substantially all of the remaining 17.6%
minority interest in TOC it did not already own. Otherwise total other expenses
increased as illustrated when the non-cash, non-recurring compensation expense
of $47,983,000 incurred in September 2004 is excluded.

Total other
expenses, net of the compensation expense from exchange of stock options,
increased $4,023,000 or 17.4% for the year ended December 31, 2005. As a
percentage of revenues, total other expenses, net of compensation expense from
the exchange of stock options, were 63.4% and 58.0% in the years ended December 31,
2005 and 2004, respectively.

The increase in
other expenses was due to several factors, such as increased corporate costs
including: (1) amortization of intangible assets; (2) costs
associated with compliance with Sarbanes-Oxley Act of 2002; and (3) costs
associated with incorporation in Delaware and listing on The Nasdaq National
Market, to which we became subject as of September 2004. Those increased
costs will continue to be incurred becoming part of our cost of doing
business. The increase is also attributable to increased personnel costs, costs
associated with the launch of our second channel, Outdoor Channel 2 HD,
marketing and promotion costs and other items more fully described as follows.

Advertising
expenses for the year ended December 31, 2005 were $7,100,000, an increase
of $1,504,000 or 26.9% compared to $5,596,000 for the year ended December 31,
2004. The increase in advertising expenses is principally a result of our
increased spending on consumer and trade industry awareness campaigns designed
to build demand for The Outdoor Channel and for Outdoor Channel 2 HD.

Selling, general
and administrative expenses for the year ended December 31, 2005 were
$17,375,000, an increase of $1,222,000 or 7.6% compared to $16,153,000 for the
year ended December 31, 2004. As a percentage of revenues, selling,
general and administrative expenses were 40.5% and 40.4% in the years ended December 31,
2005 and 2004, respectively.

The increase was
primarily due to the increase in the number of employees late in 2004 and early
2005. We opened our New York City advertising sales office with a resultant
expense in 2005 that did not exist in the same period a year ago. We have also
added an executive to our management team who holds the position of General
Counsel. Others have been added in all departments to support our launch of a
second channelOutdoor Channel 2 HD. We also experienced increased travel and
related costs associated with our larger advertising sales staff, support of
our service providers and the promotion of The Outdoor Channel and Outdoor
Channel 2 HD through a stronger presence at trade shows and conferences. Small
equipment purchases increased as a result of our activity related to the launch
of Outdoor Channel 2 HD. We increased other corporate overhead expenses such as
our activity surrounding Sarbanes-Oxley compliance in 2005, fees for our
listing on Nasdaq National Market and fees associated with incorporation in the
State of Delaware.

Compensation
expense from the exchange of stock options for the year ended December 31,
2004 was $47,983,000 and was incurred as a result of the issuance of 3,687,125
options to TOC option holders in accordance with the terms of the acquisition
of substantially all of the remaining 17.6% minority interest in TOC we did not
already own. This charge is both non-cash and non-recurring.

52

Depreciation and
amortization expense for the year ended December 31, 2005 was $2,721,000, an
increase of $1,297,000 or 91.1% compared to $1,424,000 for the year ended December 31, 2004. The
increase relates primarily to the inventory of HD cameras and edit equipment
that we begun purchasing in 2004 and continued in 2005 to support our increased
efforts to produce more of our programming in-house as opposed to licensing
such programming from third parties. Also contributing to the increase is a
full year of amortization expense related to the intangible assets recorded in
connection with the acquisition of the minority interest of The Outdoor
Channel, Inc, in September 2004.

Income (loss) from
operations for the year ended December 31, 2005 was $2,798,000, a change
of $42,502,000 compared to ($39,704,000) for the year ended December 31,
2004. As a percent of revenues, income (loss) from operations was 6.5% and
(99.4%), respectively.

As explained above, the non-cash, non-recurring compensation
charge of $47,983,000, which resulted from the assumption of options in
connection with the acquisition of the minority interest in TOC, accounts for
the majority of the loss from operations for the year ended December 31,
2004. If we excluded this charge, loss from operations for the year ended December 31,
2004 would have been income from operations of $8,279,000. As a percentage of
revenue this adjusted balance would have been 20.7% for the year ended December 31,
2004.

Interest expense for the
year ended December 31, 2005 was $45,000, an increase of $40,000 compared
to $5,000 for the year ended December 31, 2004. This is attributable to
having obtained two term loans in November 2005 with an original aggregate
principal amount of $4,950,000 with effective fixed interest rates of 6.59% and
6.35%.

Other income for the year ended December 31, 2005 was
$943,000, an increase of $823,000 compared to $120,000 for the year ended December 31,
2004. This improvement was primarily due to increased dividends and interest
earned on our increased investment in available-for-sale securities and cash
and cash equivalent balances that resulted from the sale, on July 1, 2005,
of 3,500,000 shares of common stock for net cash proceeds of $43,350,000 plus
$2,734,000 from the exercise of stock options during the year ended December 31,
2005.

Income (loss)
before income taxes and minority interest as a percentage of revenues was 8.6%
for the year ended December 31, 2005 compared to (99.1%) for the year
ended December 31, 2004.

The TOC segments
income before income taxes and minority interest increased to $4,865,000 for
the year ended December 31, 2005 from a loss of $38,330,000 for the year
ended December 31, 2004. Expressed as a percentage of revenue, the TOC
segments income before income taxes and minority interest increased to 13.0%
for the year ended December 31, 2005, compared to (110.8%) for the year
ended December 31, 2004. The 2004 TOC segments income before income
taxes, excluding the non-cash, non-recurring charge of $47,983,000 was
$9,653,000 or 27.9% of revenue. The change in TOC segments income before
income taxes after the non-cash compensation charge was due mainly to the
growth of our programming expenses and increased staff in support of the launch
of our second channel, Outdoor Channel 2 HD, increased spending on advertising,
personnel and travel/promotional related expenses as well as depreciation
expenses related to the deployment of additional equipment.

53

The Membership
Division segments income before income taxes and minority interest decreased
to $280,000 for the year ended December 31, 2005 from $354,000 for the
year ended December 31, 2004. Expressed as a percentage of revenues, the
Membership Division segments income before income taxes and minority interest
decreased to 5.2% for the year ended December 31, 2005 compared to 6.6%
for the year ended December 31, 2004. The decrease is principally a result
of a 5% increase in payroll and related taxes along with a charge for stock
compensation that did not exist in 2004.

Corporate incurred a loss before income taxes and minority
interest for the year ended December 31, 2005 amounting to $1,449,000, a
change of $164,000 compared to a loss of $1,613,000 for the year ended December 31,
2004. The expenses allocated to Corporate include: professional fees such as
public relations, accounting and legal fees, business insurance, board of
directors fees and expenses and an allocation of corporate officers payroll
and related expenses.

Income tax provision for the year ended December 31, 2005 was
$1,503,000, a change of $17,514,000 as compared to a benefit of $16,011,000 for
the year ended December 31, 2004. The increase was principally due to the
Company earning taxable income in 2005 as compared to a loss for 2004. The
effective income tax rate was approximately 40.7% and 40.4% for the years ended
December 31, 2005 and 2004, respectively.

Minority interest for the year ended December 31, 2004 was
$682,000. Minority interest was eliminated in September 2004 as a result
of our acquisition of the remaining minority interest in TOC we did not already
own. Therefore, there was no minority interest for the year ended December 31,
2005.

Net income (loss) for the year ended December 31, 2005 was
$2,193,000, a change of $26,453,000 compared to ($24,260,000) for the year
ended December 31, 2004. The increase was due to the reasons stated above.
Excluding the non-cash, non-recurring charge of $47,983,000, net of income tax
benefit of $19,098,000, net income for the year ended December 31, 2004
would have been $4,625,000 or 11.6% of revenue.

We generated $6,649,000 of cash in our operating
activities in the year ended December 31, 2006, compared $2,882,000 in the
year ended December 31, 2005 and had a cash and cash equivalent balance of
$15,447,000 at December 31, 2006, a decrease of $2,829,000 from the
balance of $18,276,000 at December 31, 2005. We also had short-term
investments classified as available-for-sale securities of $42,144,000 at December 31,
2006, an increase of $3,314,000 from the balance of $38,830,000 at December 31,
2005. The investments at December 31, 2006 were comprised principally
of auction rate securities ($41,250,000) with interest rates that generally
reset every 28 days. The auction rate securities have long-term maturity
dates and provide us with enhanced yields. Various equity securities ($894,000)
make up the remainder of the December 31, 2006 balance. We believe we have
the ability to quickly liquidate the auction rate securities at their original
cost although there is no guaranty we would be able to do so. Net working
capital increased to $67,346,000 at December 31, 2006, compared to
$66,183,000 at December 31, 2005.

Net cash used in investing activities was $5,738,000
in the year ended December 31, 2006 compared to $48,661,000 for the year
ended December 31, 2005. The decrease in cash used in investing activities
was related principally to the net difference of sales and purchases of
short-term auction rate securities. In

54

2005, we received net
proceeds from the sale of common stock of $43,350,000 that was invested during
the year resulting in the higher amount used for investing in 2005.
Additionally contributing to the decrease in cash used by investing activities
was a decrease in capital expenditures in 2006 compared to 2005. In 2005, we
acquired equipment related to our HD signal and production in anticipation of
the launch of our second channel on July 1, 2005. Also, in 2005, we
purchased a number of vehicles we use in support of affiliate sales and our
annual Alaska trip. We completed the purchase of and had begun the construction
of improvements on a building to house our broadcast facility in 2005 incurring
approximately $7.5 million in capital expenditures in 2005. We have
substantially completed the building improvements and placed the facility into
service on April 1, 2006. Additional capital expenditures were for fixed
asset replacements. In 2007, we have planned general replacement capital
expenditures of $1 to $1.5 million and possibly the acquisition of some land
adjacent to our broadcast facility to be used for a parking facility. If we are
successful in acquiring this property, we would complete the build-out of
warehouse space to move the remainder of our TOC and corporate staff, vacating
space we currently rent. We believe the total project cost would be between $1
to $1.5 million and that we have sufficient capital either on-hand or to be
generated from operations to fund these acquisitions.

Cash used in financing activities was $3,740,000 in
the year ended December 31, 2006 compared to cash provided by financing
activities of $50,950,000 for the year ended December 31, 2005. The cash
used in financing activities in the year ended December 31, 2006 was
primarily for the retirement of our long-tem debt ($4,901,000) offset by the
proceeds from the sale of shares upon the exercise of stock options and
estimated tax benefits from the exercise of stock options in excess of
recognized expense. We also used $568,000 to purchase and retire shares of
stock from employees to satisfy the employees income taxes due as a result of
the shares having vested. We also received $913,000 from the exercise of stock
options. The cash provided by financing activities in 2005 was from the
completion, on July 1, 2005, of a public offering of our common stock,
whereby we sold 3,500,000 shares of common stock and received net proceeds of
$43,350,000. In addition certain selling stockholders exercised options to buy
1,688,000 shares of common stock, which were resold in the public offering. On July 13,
2005, the underwriters exercised their over-allotment option granted by certain
selling stockholders and purchased an additional 442,000 shares of common
stock. The shares sold by the selling stockholders were purchased
immediately before the sale through the exercise of options they held to buy common
shares from the Company. The Company received $2,168,000 in the aggregate from
the exercise of these options. The Company also received cash proceeds of
approximately $566,000 from the exercise of other options for the purchase of
318,000 shares of common stock. In accordance with SFAS 123R, we have
presented on a prospective basis the tax benefits from exercise of stock
options in excess of recognized expense of $816,000 as a cash flow from
financing activities in the accompanying unaudited consolidated statement of
cash flows for the year ended December 31, 2006, rather than as a cash
flow from operating activities, as was prescribed under accounting rules applicable
through December 31, 2005. Tax benefits from the exercise of stock options
in excess of recognized expense of $876,000 has been included as a cash flow
from operating activities for the year ended December 31, 2005.

On November 2, 2005, we renewed our revolving
line of credit agreement (the revolver) with U.S. Bank N.A. (the Bank),
extending the maturity date to September 7, 2007 and increasing the total
amount, which can be drawn upon under the revolver from $5,000,000 to
$8,000,000. The revolver provides that the interest rate shall be LIBOR plus
1.25%. The revolver is collateralized by substantially all of our assets. This
credit facility contains customary financial and other covenants and
restrictions, as amended on November 2, 2005, including a change of
control provision and certain minimum profitability metrics (which, as amended,
exclude the effects of non-cash share-based employee compensation expense)
measured at each quarter end. As of December 31, 2006 and as of the date
of this report, we did not have any amounts outstanding under this credit
facility.

55

On November 2, 2005, we obtained a $1,950,000
mortgage loan from the Bank on our recently purchased building that houses our
broadcast facility located in Temecula, California which had a 10 year term
loan with a 25 year amortization schedule. This loan carried a variable
interest rate of LIBOR plus 1.35%. This loan was secured primarily by a Deed of
Trust on the property and was also secondarily secured by the same assets as
the revolver. It also contained customary financial and other covenants and
restrictions including a change of control provision and certain minimum
profitability metrics (which, as amended, excluded the effects of non-cash
share-based employee compensation expense) measured at each quarter end. On November 7,
2005, we entered into an interest rate swap agreement with the Bank to reduce
the potential impact of increasing interest rates and effectively fixed the
interest rate on this loan at 6.59%.

On November 2, 2005, we obtained a $3,000,000,
five-year fully amortizing term loan. This loan carried a variable interest
rate of LIBOR plus 1.35%. This term loan was secured by the same assets as the
revolver and contained customary financial and other covenants and restrictions
including a change of control provision and certain minimum profitability
metrics (which, as amended, exclude the effects of non-cash share-based
employee compensation expense) measured at each quarter end. On November 7,
2005, we entered into an interest rate swap agreement with the Bank to reduce
the potential impact of increasing interest rates and effectively fixed the
interest rate on this term loan at 6.35%. This loan was obtained to help
finance the equipment and leasehold improvements bought in relation the build
out of our broadcast facility including delivery of our HD signal and production.

Because we did not supply our financial statements for
the three and nine months ended September 30, 2006 within the time frame
prescribed by the Bank and because we did not meet the minimum profitability
covenant for the three months ended September 30, 2006, we were in
violation as of that date of two covenants relating to our two term loans and
our revolving line-of-credit facility. Accordingly, these loans were callable
by the Bank. On October 19, 2006,
we elected to retire the two long-term loans, which had an aggregate balance of
$4,321,000 plus accrued interest thereon. On March 22, 2007, we received
notification that these covenant violations were waived for these occurrences
but that these covenants continue for future periods. As of December 31,
2006, we were in compliance with the debt covenants and expect to be in
compliance at least through December 31, 2007.

As of December 31,
2006, we had sufficient cash on hand and expected cash flow from operations to
meet our short-term cash flow requirements. Management believes that our
existing cash resources including cash on-hand and anticipated cash flows from
operations will be sufficient to fund our operations at current levels and
anticipated capital requirements through at least March 1, 2008. To the
extent that such amounts are insufficient to finance our working capital
requirements or our desire to expand operations beyond current levels, we could
seek additional financing. There can be no assurance that equity or debt
financing will be available if needed or, if available, will be on terms
favorable to us or our stockholders.

A summary of our contractual obligations
as of December 31, 2006 (In thousands):

Contractual Obligations

Total

Less than 1 year

Over 1 year
Less than 3 years

Over 3 years
Less than 5 years

After
5 years

Operating lease
obligations

$

11,537

$

2,721

$

4,439

$

3,817

$

560

Standby letter of credit

140







140

Purchase obligations

7,762

6,065

1,697





Other long-term liabilities

1,626

775

851





Total

$

21,065

$

9,561

$

6,987

$

3,817

$

700

56

Operating lease obligations principally relate to commitments for
delivery of our signal via satellite. Purchase obligations relate to purchase
commitments made for the acquisition of programming, advertising and promotion
including magazine advertisements and radio show sponsorships, talent
agreements, equipment or software maintenance, research services and other
operating purchases. Other long-term liabilities represent our severance
agreement obligation with our former CEO of TOC and our compensation
commitments with our current CEO under his employment contract.

ITEM 7A.QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK.

At December 31,
2006 and 2005, our investment portfolio included fixed-income securities of
$42,144,000 and $38,830,000, respectively. These securities are subject to
interest rate risk and will decline in value if interest rates increase.
However, due to the short duration of our investment portfolio, an immediate
10% change in interest rates would have no material impact on our financial
condition, operating results or cash flows. Declines in interest rates over
time will, however, reduce our interest income while increases in interest
rates over time may increase our interest expense.

We do not have a
significant level of transactions denominated in currencies other than U.S.
dollars and as a result we have very limited foreign currency exchange rate
risk. The effect of an immediate 10% change in foreign exchange rates would
have no material impact on our financial condition, operating results or cash
flows.

As of December 31,
2006 and as of the date of this report, we did not have any outstanding
borrowings. The rate of interest on our line-of-credit is variable, but we
currently have no outstanding balance under this credit facility (and in fact
remain in default under its terms). Because of these reasons, an immediate 10%
change in interest rates would not have a material, immediate impact on our
financial condition, operating results or cash flows.

To the
Stockholders and Board of Directors
Outdoor Channel Holdings, Inc. and Subsidiaries

We have audited
the accompanying consolidated balance sheets of Outdoor Channel Holdings, Inc.
and subsidiaries as of December 31, 2006 and 2005, and the related
consolidated statements of operations, stockholders equity and cash flows for
each of the years in the three-year period ended December 31, 2006. These
consolidated financial statements are the responsibility of the Companys
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.

We conducted our
audits in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

In our opinion,
the consolidated financial statements referred to above present fairly, in all
material respects, the consolidated financial position of Outdoor Channel
Holdings, Inc., and subsidiaries as of December 31, 2006 and 2005,
and their results of operations and cash flows for each of the years in the
three-year period ended December 31, 2006, in conformity with accounting
principles generally accepted in the United States of America.

We also have audited, in
accordance with the standards of the Public Company Accounting Oversight Board
(United States), the effectiveness of Outdoor Channel Holdings, Inc. and
subsidiaries internal control over financial reporting as of December 31,
2006, based on criteria established in Internal ControlIntegrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission,
and our report dated March 16, 2007 expressed an unqualified
opinion on managements assessment, and an adverse opinion on the effectiveness
of internal control over financial reporting due to a material weakness.